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As filed with the Securities and Exchange Commission on June 30, 1999
Registration No. 333-74329
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1
to
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
CNL AMERICAN PROPERTIES FUND, INC.
(Exact name of Registrant as specified in its charter)
---------------
Maryland 525930 59-3239115
(State or other (Primary North American (I.R.S. Employer
jurisdiction Industry Identification No.)
of organization) Classification Number)
400 East South Street
Orlando, Florida 32801
407-650-1000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
James M. Seneff, Jr.
400 East South Street
Orlando, Florida 32801
407-650-1000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
With copies to:
Thomas H. McCormick, Esq.
John M. McDonald, Esq.
Shaw Pittman
2300 N Street, N.W.
Washington, D.C. 20037
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Approximate date of commencement of the proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in connec-
tion with the formation of a holding company and there is compliance with Gen-
eral Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering pur-
suant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act regis-
tration statement number of the earlier effective registration statement for
the same offering. [_]
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registra-
tion Statement shall thereafter become effective in accordance with Section
8(a) of the Securities Act of 1933 or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said sec-
tion 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The Information in this prospectus is not complete and may be changed. CNL +
+American Properties Fund, Inc. may not sell these securities until the +
+registration statement filed with the Securities and Exchange Commission is +
+effective. This Prospectus/Consent Solicitation is not an offer to sell these +
+securities and is not soliciting an offer to buy these securities in any +
+state that prohibits the offer or sale of such securities. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
Dated , 1999
PROSPECTUS/CONSENT SOLICITATION STATEMENT
CNL American Properties Fund, Inc.
27,343,243 shares of common stock, par value $.01 per share, and 7.0% callable
notes, due , 2004
If you are a limited partner of any of the following, your vote is very
important:
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CNL Income Fund, Ltd. CNL Income Fund IX, Ltd.
CNL Income Fund II, Ltd. CNL Income Fund X, Ltd.
CNL Income Fund III, Ltd. CNL Income Fund XI, Ltd.
CNL Income Fund IV, Ltd. CNL Income Fund XII, Ltd.
CNL Income Fund V, Ltd. CNL Income Fund XIII, Ltd.
CNL Income Fund VI, Ltd. CNL Income Fund XIV, Ltd.
CNL Income Fund VII, Ltd. CNL Income Fund XV, Ltd.
CNL Income Fund VIII, Ltd. CNL Income Fund XVI, Ltd.
</TABLE>
As described in detail in this Prospectus/Consent Solicitation Statement, CNL
American Properties Fund, Inc. has offered to acquire each of the 16 CNL Income
Funds listed above. We, James M. Seneff, Jr., Robert A. Bourne and CNL Realty
Corporation, as the general partners of the Income Funds, are soliciting your
consent to APF's proposed acquisition. In the acquisition, APF will issue
shares of common stock or, in specified situations, 7.0% callable notes to the
Limited Partners of the Income Funds. At the completion of the acquisition, you
will be either a stockholder or noteholder of APF and will no longer be a
Limited Partner in your Income Fund.
Through this consent solicitation and the accompanying supplement, we are
asking you, as the Limited Partners of each of the Income Funds, to vote on
whether to approve the acquisition. Limited Partners holding in excess of 50%
of the outstanding units in each Income Fund must vote "For" the acquisition on
the enclosed consent form in order for the acquisition to be consummated. We,
as the general partners of the Income Funds, recommend that you vote "For" the
acquisition.
This solicitation of consents expires at p.m., Eastern time on ,
1999, unless you are notified that it has been extended.
There are material risks and potential disadvantages associated with the
acquisition. You should carefully read "Risk Factors" beginning on page 47 and
"Federal Income Tax Consequences" beginning on page 180 for a more detailed
description of such matters. In particular, you should consider the following:
. Shares may trade at prices below the $20.00 exchange value.
. The acquisition is a taxable transaction.
. James M. Seneff, Jr. and Robert A. Bourne, two of the three general
partners of the Income Funds, will receive shares in the acquisition
and will continue in their capacities as directors of APF.
. APF will be subject to risks associated with leverage.
. You do not have any appraisal or other dissenters' rights.
. No public market for the 7.0% callable notes is expected to develop, and,
if you must sell the notes, the notes will likely sell at prices
substantially below their issuance price.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this Prospectus/Consent Solicitation Statement. Any
representation to the contrary is a criminal offense.
The date of this Prospectus/Consent Solicitation Statement is , 1999.
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----------------
NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS
TO BE HELD , 1999
CNL MANAGEMENT CENTER
450 EAST SOUTH STREET, SUITE 101
ORLANDO, FLORIDA 32801
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CNL Income Fund, Ltd. CNL Income Fund IX, Ltd.
CNL Income Fund II, Ltd. CNL Income Fund X, Ltd.
CNL Income Fund III, Ltd. CNL Income Fund XI, Ltd.
CNL Income Fund IV, Ltd. CNL Income Fund XII, Ltd.
CNL Income Fund V, Ltd. CNL Income Fund XIII, Ltd.
CNL Income Fund VI, Ltd. CNL Income Fund XIV, Ltd.
CNL Income Fund VII, Ltd. CNL Income Fund XV, Ltd.
CNL Income Fund VIII, Ltd. CNL Income Fund XVI, Ltd.
</TABLE>
James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, as the
general partners of each of the 16 CNL Income Funds listed above ask you by
this notice to attend the special meeting of Limited Partners to vote on the
following:
(a) Proposed Acquisition. Your vote on the proposed acquisition of your
Income Fund by CNL American Properties Fund, Inc., is important. In the
proposed acquisitions, APF is offering a specified number of APF Shares
as we have described in the attached Prospectus/Consent Solicitation,
to the Limited Partners of each Income Fund. After the Acquisition, APF
will own, through a subsidiary, all of the assets of the Income Funds.
The Agreement and Plan of Merger for each of the Income Funds, which
describes the terms of the Acquisition in detail is attached as
Appendix B to the supplement for each Income Fund and
(b) Other Business. At the special meeting, you will also consider such
other business as may properly come before the meeting or at any
adjournment of the meeting.
Only Limited Partners of each of the Income Funds who hold their units at
the close of business on , 1999 are entitled to notice of and to vote at
the special meeting or at any adjournment or postponement of the meeting.
By order of the General Partners,
/s/ James M. Seneff, Jr.
_____________________________________
James M. Seneff, Jr.
/s/ Robert A. Bourne
_____________________________________
Robert A. Bourne
CNL Realty Corporation
/s/ James M. Seneff, Jr.
By: _________________________________
Chief Executive Officer
Title:
We invite you to attend the special meeting or to vote using the enclosed
consent form because it is important that your shares be represented at the
meeting. Please sign, date and return the enclosed consent card in the
accompanying postage-paid envelope. If you attend the meeting, you may
personally vote, which will revoke your signed proxy. You may also revoke your
proxy at any time before the meeting either in writing or by personal
notification.
This Prospectus/Consent Solicitation Statement is first being mailed to
Limited Partners on or about , 1999.
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TABLE OF CONTENTS
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QUESTIONS AND ANSWERS ABOUT CNL AMERICAN PROPERTIES FUND, INC.'S
ACQUISITION OF THE CNL INCOME FUNDS...................................... 1
WHO CAN HELP ANSWER YOUR QUESTIONS?....................................... 6
SUMMARY................................................................... 7
Purpose of this Consent Solicitation.................................... 7
Description of APF and the Income Funds................................. 7
APF................................................................... 7
The Income Funds...................................................... 9
Material factors that make the offering speculative or risky.......... 9
Conflicts of and Benefits to General Partners........................... 10
The Acquisition......................................................... 11
Principal Components of the Acquisition............................... 11
What you will receive if your Income Fund is acquired in the
Acquisition.......................................................... 13
Consideration Paid to Income Funds.................................... 14
Our Reasons for Supporting the Acquisition.............................. 15
Benefits of Participation in the Acquisition.......................... 15
Our Recommendation to You............................................. 17
Why we believe the Acquisition is fair to you......................... 17
Fairness Opinions..................................................... 18
Appraisals............................................................ 18
Alternatives to the Acquisition that we considered.................... 18
Prices for Income Fund Units.......................................... 20
The Restaurant Properties............................................... 21
Financing Services...................................................... 23
Voting.................................................................. 23
Voting Procedures..................................................... 23
Amendments to Your Income Fund's Partnership Agreement................ 23
No Rights to Independent Appraisal.................................... 23
Comparison of Ownership of APF Shares and Units......................... 24
Acquisition Expenses.................................................... 25
Conditions to the Acquisition........................................... 25
Federal Income Tax Considerations....................................... 26
The Acquisition will be a taxable transaction for Limited Partners
subject to federal income taxation................................... 26
Taxable Gain and Loss Estimates Per Average $10,000 Original Limited
Partner Investment................................................... 27
Qualification of APF as a REIT........................................ 27
Summary Financial Information........................................... 28
Summary Historical Consolidated Financial Data of APF and
subsidiaries ........................................................ 29
Summary Combined Historical Financial Data of the Income Funds........ 31
Summary Consolidated Historical Financial Data of CNL Fund Advisors,
Inc. and Subsidiary.................................................. 32
Summary Historical Financial Data of CNL Financial Services, Inc. .... 33
Summary Historical Financial Data of CNL Financial Corporation........ 34
Summary Unaudited Pro Forma Combined Financial Data of APF for the
Quarter Ended March 31, 1999......................................... 35
Summary Unaudited Pro Forma Combined Financial Data of APF for the
Year Ended
December 31, 1998................................................... 42
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RISK FACTORS.............................................................. 46
You May be Subject to the Following Risks if You Become an APF
Stockholder in the Acquisition......................................... 46
The exchange value was determined by APF, and the trading price of the
APF Shares may decrease below the exchange value upon listing........ 46
The general partners will receive benefits from the Acquisition and
will have conflicts of interest in the Acquisition................... 46
Existing stockholders will be diluted by the public offering.......... 47
A majority vote of Limited Partners of Income Funds binds all Limited
Partners............................................................. 47
Partners have no cash appraisal rights................................ 47
The size of APF after Acquisition is uncertain........................ 47
The Acquisition will result in a fundamental change in the nature of
your investment...................................................... 47
The loss of a significant tenant would adversely affect APF's income.. 48
Tenants of two significant restaurant chains have filed for bankruptcy
protection........................................................... 48
APF would be required to pay termination fees in its interest rate
swap contracts if it terminates such contracts early................. 48
An increase in interest rates could adversely affect the price of APF
shares............................................................... 49
APF's officers and directors have more limited liability than we do as
your Income Fund's general partners.................................. 49
As general partners, our fiduciary duties to you as Limited Partners
may be greater than our fiduciary duties as directors of APF to you
once you become APF stockholders..................................... 49
Lawsuits have been filed against us and APF in connection with the
Acquisition.......................................................... 50
If APF's borrowers default on mortgage loans, APF's income could be
adversely affected................................................... 50
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................................ 50
The retained subordinated interests and interest-only securities that
APF holds in securitizations may not be recoverable under certain
conditions........................................................... 51
APF's increased leverage increases APF's risk of default which could,
in turn, adversely affect APF's results of operations and stockholder
distributions........................................................ 51
APF's ability to incur additional secured debt may reduce the value of
the notes held by former Limited Partners of the Income Funds........ 52
APF's plan to grow through the acquisition and development of new
restaurant properties could be adversely affected by trends in the
real estate and financing businesses................................. 52
The inability of a tenant or borrower to make lease and mortgage
payments could have an adverse affect on APF......................... 52
APF's failure to qualify as a REIT for tax purposes would result in
APF's taxation as a corporation and the reduction or elimination of
funds available for stockholder distribution......................... 52
Certain of APF's leases of restaurants where APF does not own the
underlying land may not be considered leases by the IRS, which could
result in adverse tax consequences................................... 53
APF's secured equipment leases are not considered qualified real
estate assets under the REIT rules, and, if APF has secured equipment
leases in excess of certain percentages of its assets, it would
violate the REIT rules............................................... 53
If APF cannot meet its REIT distribution requirements, it may have to
borrow funds or liquidate assets to maintain its REIT status......... 54
Limitations on share ownership required to maintain APF's REIT status
may deter attractive tender offers for APF Shares.................... 54
Pending REIT Legislation could have an adverse effect on APF's ability
to enter into securitization transactions involving non-mortgage
loans................................................................ 54
Changes in the tax law could adversely affect APF's REIT status....... 54
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There Are Also Risk Factors Related to Restaurant Properties to which
You Will Continue to be Subject as an APF Stockholder.................. 55
APF may not be able to re-lease restaurant properties upon the
expiration of leases................................................. 55
Many tenants have purchase rights and rights of first offer which may
restrict APF's control over sale of the restaurant properties........ 55
The business of owning and developing real estate properties involves
risks................................................................ 55
Compliance with various environmental laws could be costly to APF..... 55
Trends in the restaurant industry could adversely affect the
performance of the restaurant chains that lease from APF............. 56
The failure rate of franchised restaurant chains may adversely affect
APF's business....................................................... 56
BACKGROUND OF AND REASONS FOR THE ACQUISITION............................. 57
Background of the Income Funds.......................................... 57
Investment Objectives of Income Funds................................... 57
Our Efforts to Liquidate the Income Funds............................... 58
Chronology of the Acquisition........................................... 59
Background of our recommendation that the Income Funds be acquired by
APF.................................................................... 67
Our Reasons for Proposing the Acquisition............................... 69
Comparative Valuation Analysis.......................................... 70
OUR RECOMMENDATION AND FAIRNESS DETERMINATION............................. 71
General................................................................. 71
Material Factors Underlying Belief as to Fairness....................... 71
Relative Weight Assigned to Material Factors............................ 74
Fairness to Limited Partners Receiving APF Shares in the Acquisition.... 74
Fairness in View of Conflicts of Interest............................... 75
REPORTS, OPINIONS AND APPRAISALS.......................................... 76
General................................................................. 76
Fairness Opinions to General Partners................................... 76
Income Fund Appraisals.................................................. 81
Fairness Opinions of Merrill Lynch to APF's Special Committee with
respect to the CNL Restaurant Businesses and the Income Funds.......... 85
THE ACQUISITION........................................................... 94
Conditions to Acquisition............................................... 94
Merger Agreements....................................................... 94
Approval and Recommendation of the General Partners..................... 95
Vote Required for Approval of the Acquisition........................... 95
Consideration........................................................... 95
Estimated Value of APF Shares Payable to Income Funds................... 96
No Fractional APF Shares................................................ 96
Effect of the Acquisition on Limited Partners Who Vote Against the
Acquisition............................................................ 97
Effect of Acquisition on Income Funds Not Acquired...................... 97
Acquisition Expenses.................................................... 97
Accounting Treatment.................................................... 97
BENEFITS OF THE ACQUISITION............................................... 98
Growth Potential........................................................ 98
Diversification Benefit................................................. 98
Operational Economies of Scale.......................................... 98
Liquidity............................................................... 99
Future Development and Mortgage Loan Opportunities...................... 99
Public Market Valuation of Assets....................................... 99
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Regular Quarterly Cash Distributions................................... 99
Greater Access to Capital.............................................. 100
Greater Reduction of Conflicts of Interest............................. 100
CONFLICTS OF INTEREST.................................................... 100
Affiliated General Partners............................................ 100
Substantial Benefits to General Partners............................... 100
COMPARISON OF OWNERSHIP OF UNITS, NOTES AND APF SHARES................... 101
Form of Organization and Purpose....................................... 101
Length and Type of Investment.......................................... 102
Business and Property Diversification.................................. 102
Borrowing Policies..................................................... 103
Other Investment Restrictions.......................................... 103
Management Control..................................................... 104
Fiduciary Duties....................................................... 104
Management's Liability and Indemnification............................. 105
Antitakeover Provisions................................................ 106
Sale................................................................... 106
Merger................................................................. 107
Dissolution............................................................ 107
Amendments............................................................. 107
Compensation and Fees.................................................. 108
Review of Investor Lists............................................... 109
Nature of Investment................................................... 110
Additional Equity/Potential Dilution................................... 111
Liability of Investors................................................. 111
Voting Rights.......................................................... 112
Liquidity.............................................................. 112
Expected Distributions and Payments.................................... 113
Taxation of Taxable Investors.......................................... 114
Taxation of Tax-Exempt Investors....................................... 115
VOTING PROCEDURES........................................................ 116
Distribution of Solicitation Materials................................. 116
Special Meetings....................................................... 116
Required Vote and Other Conditions..................................... 117
SELECTED HISTORICAL FINANCIAL DATA OF APF................................ 119
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF APF.................................................... 120
Overview............................................................... 120
Liquidity and Capital Resources........................................ 122
Results of Operations.................................................. 123
Year 2000 Readiness Disclosure......................................... 125
Quantitative and Qualitative Disclosures About Market Risk............. 127
Future Business Plans.................................................. 127
APF'S BUSINESS AND THE RESTAURANT PROPERTIES............................. 128
APF's Business......................................................... 128
General.............................................................. 128
Business Objectives and Strategies................................... 129
Competitive Advantages............................................... 131
APF's Recent Expansion of Services................................... 132
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The Restaurant Properties................................................ 134
General................................................................ 134
Evaluation of Investment Opportunities................................. 138
Financial Products and Services........................................ 139
The Food Service Industry.............................................. 143
Environmental Matters.................................................. 144
Insurance.............................................................. 145
Competition............................................................ 145
Regulation of Mortgage Loans and Equipment Leases...................... 145
Franchise Regulation................................................... 146
Employees.............................................................. 146
Legal Proceedings...................................................... 146
BUSINESS OF THE INCOME FUNDS............................................... 147
General.................................................................. 147
Management Services...................................................... 148
Site Selection and Acquisition of Restaurant Properties.................. 148
Standards for Investment................................................. 149
Description of Restaurant Properties..................................... 150
Description of Leases.................................................... 153
Joint Venture/Tenancy in Common Arrangements............................. 155
Financing................................................................ 156
Sale of Restaurant Properties............................................ 156
Competition.............................................................. 157
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES................................ 158
APF...................................................................... 158
Investment Policies.................................................... 158
Financing Policies..................................................... 159
Miscellaneous Policies................................................. 159
Working Capital Reserves............................................... 160
The Income Funds......................................................... 160
Investment Policies.................................................... 160
Financing.............................................................. 160
MANAGEMENT................................................................. 160
Directors and Executive Officers......................................... 160
Board of Directors....................................................... 164
Executive Compensation................................................... 165
Employment Agreements.................................................... 165
1999 Performance Incentive Plan.......................................... 165
Other Incentive Compensation............................................. 166
PRINCIPAL STOCKHOLDERS OF APF.............................................. 167
FIDUCIARY RESPONSIBILITY................................................... 168
Directors and Officers of the Company.................................... 168
General Partners of the Income Funds..................................... 168
DESCRIPTION OF CAPITAL STOCK............................................... 170
Preferred Stock.......................................................... 170
Ownership Limits and Restrictions on Transfer............................ 170
Registrar and Transfer Agent............................................. 172
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DESCRIPTION OF THE NOTES.................................................. 173
General Terms of the Notes.............................................. 173
Principal Amount of the Notes and the Repayment thereof................. 174
Interest Rate........................................................... 174
Redemption.............................................................. 174
Proceeds from Sale of Restaurant Properties Formerly Owned by the Income
Funds.................................................................. 175
Proceeds from Refinancings of Restaurant Properties Formerly Owned by
the Income Funds....................................................... 175
Limitation on Incurrence of Indebtedness................................ 175
Merger, Consolidation or Sale........................................... 176
Events of Default, Notice and Waiver.................................... 176
Modification of the Indenture........................................... 177
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS TO THE GENERAL PARTNERS.... 179
FEDERAL INCOME TAX CONSIDERATIONS......................................... 180
Certain Tax Differences between the Ownership of Units and APF Shares... 180
Tax Consequences of the Acquisition..................................... 181
Taxation of APF......................................................... 184
Taxation of Stockholders................................................ 192
EXPERTS................................................................... 195
LEGAL MATTERS............................................................. 195
WHERE YOU CAN FIND MORE INFORMATION....................................... 196
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QUESTIONS AND ANSWERS ABOUT
CNL AMERICAN PROPERTIES FUND, INC.'S ACQUISITION OF THE
CNL INCOME FUNDS
Q: What is the proposed Acquisition that I am being asked to vote upon?
A: You are being requested to approve the acquisition of your CNL Income Fund
by CNL American Properties Fund, Inc. Your CNL Income Fund is one of 16
limited partnerships, which we refer to as the Income Funds, that CNL
American Properties Fund, Inc., or APF as we call it, is seeking to
acquire.
Q: Who is soliciting my approval of the proposed Acquisition?
A: We, James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, as
the general partners of the Income Funds, are soliciting your approval for
the Acquisition.
Q: Do you, as the general partners of my Income Fund, recommend that I vote
"For" the proposed Acquisition?
A: Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of
your investment in your Income Fund, as opposed to liquidating your Income
Fund's portfolio or continuing unchanged the investment in your Income
Fund.
Q: What is CNL American Properties Fund, Inc.?
A: APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to
operators of national and regional restaurant chains on a triple-net lease
basis. Unlike your Income Fund which is restricted, due to capital and
other limitations, to owning and leasing a static number of restaurant
properties on a triple-net basis, APF has the ability to offer a complete
range of restaurant property services to operators of national and regional
restaurant chains from triple-net leasing and mortgage financing to site
selection, construction management and build-to-suit development. If APF
acquires all of the Income Funds in the Acquisition, APF expects to have
total assets of approximately $1.5 billion at the time the Acquisition is
consummated and will be one of the largest triple-net lease REITs in the
United States.
Q: What is a REIT?
A: In general, a REIT is a company that owns or provides financing for real
estate, offers the benefits of a diversified portfolio under professional
management and pays annual distributions to investors of at least 95% of
its taxable income. A REIT typically is not subject to federal income
taxation on its net income, provided that it meets specific income tax
requirements. This treatment substantially eliminates the "double taxation"
imposed at both the corporate and stockholder levels that generally results
from investments in a corporation.
Q: What will I receive if my Income Fund approves the Acquisition?
A: In the event that your Income Fund approves the Acquisition, you will be
entitled to receive shares of APF common stock in exchange for the units of
limited partnership interest that you own in your Income Fund. The APF
Shares will be listed for trading on the New York Stock Exchange, or NYSE,
concurrently with the consummation of the Acquisition.
Q: What benefits will I receive from becoming an APF stockholder?
A: We believe that the APF Shares you would receive in the Acquisition will
provide you with increased growth potential since APF is a growth-oriented
operating company of unlimited duration, as opposed to a finite-life,
closed-end limited partnership. As of March 31, 1999, assuming the
completion of the acquisition of the CNL Restaurant Businesses
1
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as described in this consent solicitation, APF would have owned an interest
in 1,113 restaurant properties and, assuming the acquisition of all of the
Income Funds, APF would have owned an interest in 1,687 restaurant
properties. Compared to your Income Fund investment, an investment in APF
will provide you with lower risk through diversification geographically, by
restaurant chain and by restaurant operator. Finally, since the APF Shares
will be listed for trading on the NYSE, your units, for which there is no
established trading market, will be converted into freely-tradable
securities.
Q: What material risks and considerations should I consider in determining
whether to vote "For" or "Against" the Acquisition?
A: There are a number of material risks and considerations that you should
consider, including:
. We are uncertain as to the value at which APF Shares will trade
following listing.
. We have material conflicts in light of our being both general partners
of the Income Funds and members of APF's Board of Directors.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. As stated below, the Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
The material risks and considerations are more fully described later in
this consent solicitation.
Q: How many APF Shares will I receive if my Income Fund is acquired by APF?
A: The number of APF Shares that will be paid to each Income Fund in the
Acquisition is set forth in the chart on page 14 under the caption
"Summary--The Acquisition--Consideration Paid to the Income Funds" and in
the supplement accompanying this consent solicitation. You will receive
your proportion of such shares in accordance with the terms of your Income
Fund's limited partnership agreement.
Q: What is the value of an APF Share?
A: APF has assigned a value, which we refer to as the exchange value, of
$20.00 per share for the APF Shares. Because the APF Shares are not listed
on the NYSE at this time, the value at which an APF Share may trade is
uncertain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for trading
on the NYSE. We do not know the value at which an APF Share will trade on
the NYSE upon listing. It is possible that the APF Shares will trade at
prices substantially below the exchange value. APF has, however, recently
sold $750 million of APF Shares through three public offerings. After
giving effect to a recently-approved one-for-two reverse stock split, the
adjusted offering price per APF Share from these offerings is equal to the
exchange value. At March 31, 1999, APF has invested all of the net offering
proceeds to acquire restaurant properties, to make mortgage loans and to
pay fees and other expenses.
Q: Did you receive a fairness opinion in connection with APF's acquisition of
my Income Fund?
A: Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an
opinion that the APF Share consideration offered by APF to your Income Fund
is fair to the Income Fund from a financial point of view.
Q: Is the purchase price being paid to my Income Fund greater than its
appraised value?
A: Based on the exchange value, the purchase price payable by APF to your
Income Fund is greater than your Income Fund's appraised value assuming the
Income Fund was to liquidate or continue unchanged. To assist us in our
evaluation of APF's offer, we engaged
2
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Valuation Associates, a nationally recognized, fully-diversified real
estate appraisal firm, as an independent third party appraiser, to appraise
the restaurant properties owned by your Income Fund.
Q: Will I receive future distributions with respect to the APF Shares I
receive in the Acquisition?
A: Yes. Historically, APF has made quarterly distributions and it expects to
continue to do so in the future. In order to maintain APF's status as a
REIT, APF must distribute at least 95% of its taxable income to its
stockholders on an annual basis.
Q: In the event that my Income Fund is acquired by APF, may I choose to
receive something other than APF Shares?
A: Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2004 in an amount equal to 97% of your portion of the APF Share
consideration that would otherwise have been paid to your Income Fund,
based on the exchange value. Please note that you may only receive the note
option if you vote "Against" the Acquisition, and you elect to receive the
notes on your consent form. You will receive APF Shares if your Income Fund
elects to be acquired in the Acquisition and you vote "For" the
Acquisition, or you vote "Against" the Acquisition and do not affirmatively
select the notes option on your consent form. In addition, if Limited
Partners in your Income Fund elect to receive notes in an amount greater
than 15% of the estimated value of APF Shares, based on the exchange value,
to be paid to your Income Fund, then APF has the right to decline to
acquire your Income Fund. The notes will not be listed on any exchange or
automated quotation system, and a market for the notes will not likely
develop.
Q: How long has APF been an operating company and how large is it?
A: Since its inception in 1994 through March 1999, APF has raised
approximately $750 million in three public offerings. Assuming the
acquisition of the CNL Restaurant Businesses, as of March 31, 1999, APF
would have owned an interest in 1,113 restaurant properties, including
mortgage loans of over $573 million, and had approximately 32,000
stockholders of record.
Q: Who manages APF?
A: APF is managed by its Board of Directors, consisting of five members, the
majority of which are independent. Independent directors are neither
employed by APF, nor have a substantial financial interest in APF. James M.
Seneff, Jr. is the Chairman of the Board and Robert A. Bourne is Vice
Chairman of the Board. You should note that Messrs. Seneff and Bourne are
also the individual general partners of your Income Fund.
Q: Why is APF seeking to acquire the Income Funds, including my Income Fund?
A: Because the restaurant properties owned by the Income Funds are very
similar to those owned by APF, APF believes, and we agree, that the
combination of the Income Funds' restaurant properties with APF's
restaurant properties would be mutually beneficial to both current APF
stockholders and to you and the other Limited Partners of the Income Funds
who may become stockholders of APF. APF believes, and we agree, that the
increase in the size of APF's restaurant property portfolio will benefit
stockholders as a result of an increase in operating efficiencies and
increased borrowing capacity.
Q: Is APF's acquisition of my Income Fund dependent on its acquisition of the
other Income Funds?
A: There is no requirement that a minimum number of Income Funds be acquired
by APF. The Special Committee of APF's Board of Directors has received a
fairness opinion from Merrill Lynch & Co., an internationally recognized
independent investment banking firm, stating that the aggregate
consideration to be paid by APF for the acquisition of all of the
3
<PAGE>
Income Funds is fair to APF from a financial point of view. To the extent
that prior to the consummation of the Acquisition less than all of the
Income Funds approve the Acquisition, The Special Committee of APF must
receive from Merrill Lynch another fairness opinion at the time of the
closing of the Acquisition stating that the consideration payable to the
Income Funds that approved the Acquisition is fair to APF from a financial
point of view. In the event that Merrill Lynch is unable to render the
subsequent fairness opinion, none of the Income Funds will be acquired.
Q: What benefits will the general partners of my Income Fund receive as a
result of the Acquisition?
A: Like you, we have an ownership interest in your Income Fund. Accordingly, we
will be entitled to receive our portion of the APF Shares paid for your
Income Fund in accordance with the terms of your Income Fund's partnership
agreement. To determine if we are receiving any APF Shares, please review
the supplement accompanying this consent solicitation.
Q: What are the tax consequences of the Acquisition to me?
A: The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners of the Income Funds are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an
individual subject to income taxation or a tax-paying entity and you receive
APF Shares, the tax that you must pay will generally be based on the
difference between the value of the APF Shares you receive and the tax basis
of your units. If you elect to receive notes, your tax will be based upon
your allocable share of the gain which will be recognized by your Income
Fund; your Income Fund's gain will generally equal the excess, if any, of
the value of the APF Shares received by your Income Fund over the tax basis
of your Income Fund's net assets. Some of the gain may be subject to the 25%
rate of tax applicable to certain types of real property gain.
We urge you to consult with your tax advisor to evaluate the taxes that
will be incurred by you as a result of your participation in the
Acquisition.
To review the tax consequences to the Limited Partners of the Income Funds
in greater detail, see pages 180 through 194 of this consent solicitation
and the accompanying supplement.
Q: Who can vote on the Acquisition? What vote is required to approve the
Acquisition?
A: Limited Partners of each Income Fund who are Limited Partners at the close
of business on the record date of , 1999 are entitled to vote at the
special meeting.
For an Income Fund to be acquired by APF, Limited Partners holding Units
constituting greater than 50% of the outstanding units of a Income Fund
must approve the Acquisition. Such an approval by your Income Fund's
Limited Partners in favor of the Acquisition will be binding on you even if
you vote against the Acquisition.
Q: Am I entitled to an independent appraisal of my units at my request?
A: No. However, a market valuation and a liquidation valuation of the
restaurant properties owned by your Income Fund has been prepared by
Valuation Associates. See the accompanying supplement for details.
Q: When and where is the special meeting of Limited Partners?
A: The special meeting of the Limited Partners for each Income Fund to vote on
the Acquisition will be held at 10:00 a.m. on , , 1999, at
.
Q: How do I vote?
A: Just indicate on the enclosed consent form, which is printed on the colored
paper, how you want to vote, and sign and mail it in the enclosed postage
paid return envelope as soon as possible, so that at the special meeting of
4
<PAGE>
Limited Partners, your units may be voted "For" or "Against" the
acquisition of your Income Fund. If you prefer, you may also vote by
telephone, following the instructions on your consent form. If you sign and
send in your consent form and do not indicate how you want to vote, your
consent will be counted as a vote "For" the Acquisition. If you do not vote
or you abstain from voting, it will count as a vote "Against" the
Acquisition.
Q: Can I change my vote after I mail my consent form?
A: Yes, you can change your vote at any time before your consent is voted at
the special meeting. You can do this in three ways: first, you can send us
a written statement that you would like to revoke your consent; second, you
can send us a new consent form; or third, you can attend the Special
Meeting and vote in person. Any revocation or new consent form should be
sent to Corporate Election Services, P.O. Box 125, Pittsburgh, PA 15230-
0125, our vote tabulator.
Q: I am a Limited Partner of more than one Income Fund. Why did I receive only
one consent solicitation?
A: Many of the Limited Partners in the Income Funds own Units in more than one
Income Fund. To reduce expenses and to prevent our Limited Partners from
receiving duplicate mailings, we decided to send only one consent
solicitation to Limited Partners who our records show own units in more
than one Income Fund. If you are one of these Limited Partners, we have
enclosed a page with multiple, detachable consent forms, which are on
colored paper, as well as the different supplements relating to each of the
Income Funds in which you are an investor. Please sign and return all
consent forms in the same envelope.
Q: In addition to the consent solicitation, I received a supplement. What is
the difference between the consent solicitation and the supplement?
A: The purpose of the consent solicitation is to describe the Acquisition
generally and to provide you with a summary of the risks and benefits
generic to all of the Income Funds. The purpose of the supplement is to
describe the risks and benefits particular to your specific Income Fund.
After you read the consent solicitation, we urge you to read the
supplement. The supplement contains very important information that is
unique to your Income Fund and that will be material in your decision
whether to vote "For" or "Against" the Acquisition.
Q: When do you expect the Acquisition to be completed?
A: APF, in conjunction with our efforts, plans to complete the Acquisition as
soon as possible after the receipt of your approval at the special
meetings. It is expected that the Acquisition will be consummated in the
fourth quarter of 1999, and we have required that it be completed no later
than March 31, 2000.
5
<PAGE>
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you have more questions about the Acquisition or would like additional
copies of the consent solicitation or the supplement relating to your Income
Fund(s), you should contact our solicitation firm, which we hired to assist us
in answering your questions:
D.F. King & Co., Inc.
77 Water Street
New York, New York 10005
(800) 290-6428
6
<PAGE>
SUMMARY
This summary highlights selected information from this consent solicitation
and may not contain all of the information regarding the Acquisition that is
important to you. Unless otherwise indicated, the terms "we," "us," "our," and
"ourselves" refer to James M. Seneff, Jr., Robert A. Bourne and CNL Realty
Corporation, the general partners of each of the Income Funds. When we refer to
APF, we are referring to CNL American Properties Fund, Inc. and its
subsidiaries, including CNL APF Partners, L.P., a wholly-owned limited
partnership through which APF conducts its business and which we call the
Operating Partnership. To understand the Acquisition fully and for a more
complete description of the terms of and risks related to the Acquisition, you
should read carefully this entire consent solicitation, the supplement(s)
accompanying this consent solicitation and the other documents to which we have
referred you. See "Where You Can Find More Information" on page 196.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999 and effective on
June 3, 1999.
Purpose of This Consent Solicitation
This consent solicitation describes the proposed Acquisition by CNL American
Properties Fund, Inc., a Maryland corporation, of up to 16 CNL Income Funds.
Through this consent solicitation we, as the general partners of the Income
Funds, are asking you to approve APF's acquisition of your Income Fund,
assuming the other conditions to the Acquisition are satisfied. APF will
acquire your Income Fund in the Acquisition if the Limited Partners in your
Income Fund holding greater than 50% of the outstanding units of limited
partnership interest in your Income Fund vote to approve the Acquisition.
Description of APF and the Income Funds
APF
APF is a real estate investment trust, or REIT, that provides a full range
of financial, development 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, 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. As a
fundamental component of APF's business strategy, APF endeavors to foster these
relationships by attempting to obtain complete customer satisfaction. In doing
so, APF believes it receives recurring business which ultimately increases
stockholder value.
7
<PAGE>
Through triple-net leases and mortgage loans on restaurant properties, APF
endeavors to structure its 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
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.
Since APF's inception in 1994 through March 1999, APF raised approximately
$750 million in three public offerings and used all of the net offering
proceeds to acquire restaurant properties and to make mortgage loans. Assuming
the completion of the acquisition of the CNL Restaurant Businesses as described
below, as of March 31, 1999, APF's portfolio would have consisted of
investments in 1,113 restaurant properties. Of these restaurant properties, APF
has provided triple-net lease financing for 513 properties, mortgage financing
on 312 properties, and holds a securitized mortgage interest in 288 properties.
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 what we call the CNL
Restaurant Businesses, which are essentially all of the restaurant management,
asset management, financing and development businesses conducted by affiliates
of CNL Group, Inc. The acquisition of the CNL Restaurant Businesses allows APF
to offer comprehensive restaurant property service functions to operators of
national and regional restaurant chains.
The CNL Restaurant Businesses consisted of CNL Fund Advisors, Inc., APF's
external property manager, and CNL Financial Services, Inc. and CNL Financial
Corp., entities that on a combined basis originated mortgage loans to operators
of national and regional restaurant chains comparable to the restaurant chains
that are currently APF tenants. The CNL Restaurant Financial Services Group, as
we refer to these two entities, also "securitized" a portion of the mortgage
loans originated and retained the servicing rights to such loans.
Strategically, the acquisition of the Advisor:
. provides APF with complete, in-house administrative, management,
acquisition, and development capabilities which separates APF from its
competitors;
. enables APF, through the development arm of the Advisor, to provide
incremental services to its clients which has the potential to generate
new financing opportunities and strong initial yields on its investments;
. conforms APF's corporate structure to the self-advised corporate
structure of 88% of the REITs that are listed on the NYSE with equity
market capitalization of greater than $1 billion;
. eliminates the 0.6% "management fee" and 4.5% "acquisition fee" payable
to the Advisor. APF believes the administrative costs of being self-
advised are less than the costs of remaining externally-managed and will
therefore increase cash available for distribution.
Strategically, the acquisition of the CNL Restaurant Financial Services
Group:
. provides a platform for the expansion of APF's existing financing
capabilities to include securitization transactions. APF believes that
securitization capabilities enables it to access more financing
opportunities and, ultimately, increase cash available for distribution
to its stockholders. Additionally, securitization capabilities will allow
APF to reallocate additional capital to triple-net lease financing and
mortgage loan origination;
8
<PAGE>
. allows APF to establish relationships with a broader group of operators
of national and regional restaurant chains;
. increases the total enterprise value of APF which, based on the opinion
of APF and its external financial advisors, makes APF more appealing to
institutional investors;
. mitigates any perceived conflicts, because mortgage financing and triple-
net lease financing are similar financing products that have comparable
yields, arising from determining whether to provide triple-net lease
financing internally or allow an affiliate of CNL Group, Inc. to provide
mortgage financing externally; and
. enables APF to acquire a high growth enterprise that is being valued on
the basis of public comparables trading at historical low multiples of
earnings.
As consideration for its acquisition of the CNL Restaurant Businesses, APF
issued 6.15 million APF Shares valued at the exchange value. Merrill Lynch
provided to APF an opinion that the aggregate consideration paid by APF for the
CNL Restaurant Businesses was fair to APF from a financial point of view.
APF's address is 400 East South Street, Orlando, Florida 32801, (407) 650-
1000.
The Income Funds
The Income Funds are finite-life, Florida limited partnerships that we
formed from 1985 to 1993 to invest solely in triple-net leased restaurant
properties. As of March 31, 1999, the Income Funds owned, in the aggregate, 574
restaurant properties located in 39 states which, for the quarter ended March
31, 1999, had aggregate gross revenues of approximately $11.0 million. The
Income Funds' restaurant properties are generally leased to restaurant chains
and were managed by the Advisor which, prior to its acquisition by APF, was an
affiliate of ours. The Income Funds consist of the following 16 limited
partnerships:
<TABLE>
<S> <C>
. CNL Income Fund, Ltd. . CNL Income Fund IX, Ltd.
. CNL Income Fund II, Ltd. . CNL Income Fund X, Ltd.
. CNL Income Fund III, Ltd. . CNL Income Fund XI, Ltd.
. CNL Income Fund IV, Ltd. . CNL Income Fund XII, Ltd.
. CNL Income Fund V, Ltd. . CNL Income Fund XIII, Ltd.
. CNL Income Fund VI, Ltd. . CNL Income Fund XIV, Ltd.
. CNL Income Fund VII, Ltd. . CNL Income Fund XV, Ltd.
. CNL Income Fund VIII, Ltd. . CNL Income Fund XVI, Ltd.
</TABLE>
Our address, as general partners of the Income Funds, is 400 East South
Street, Orlando, Florida 32801, (407) 650-1000. Any questions regarding the
Acquisition should be directed to D.F. King, 77 Water Street, New York, New
York 10005, Tel. (800) 290-6428.
Material factors that make the offering speculative or risky
There are risks involved in the Acquisition, which are more fully discussed
beginning at page 46 in "Risk Factors," that you should consider in determining
whether to vote in favor of the Acquisition. The following list summarizes the
risks of the Acquisition that we believe to be most material to you:
. Because there has not been a public market for the APF Shares, the
trading price of the APF Shares may fluctuate significantly, and, once
listed on the NYSE, the APF Shares may trade significantly below the
exchange value.
9
<PAGE>
. James M. Seneff, Jr., Chairman of the Board of APF, and Robert A. Bourne,
Vice Chairman of the Board of APF, both of whom also serve as general
partners of the Income Funds, will receive substantial financial benefits
from the Acquisition.
. The acquisition by APF of your Income Fund involves a fundamental change
in the nature of your investment. If the Acquisition is approved, you
will no longer hold an interest in an Income Fund which has a fixed
portfolio of restaurant properties, but will instead be a stockholder in
an operating company that will own, assuming APF acquired all of the
Income Funds on March 31, 1999, interests in 1,687 restaurant properties,
will be able to make future acquisitions of restaurant properties using
equity or indebtedness and will make mortgage loans and securitize those
mortgage loans.
. Your ability to utilize passive losses to offset income derived from your
investment in the Income Fund will no longer be available.
. To date, APF has used a limited amount of debt to acquire restaurant
properties, but going forward, APF will likely incur significantly more
indebtedness to acquire restaurant properties and make mortgage loans.
This increased use of debt will subject APF, among other risks, to an
increased risk of default on its obligations, which could in turn affect
APF's results of operations.
. The Acquisition is a taxable transaction. While a significant percentage
of the Limited Partners of the Income Funds are tax-deferred or tax-
exempt entities, such as pension plans, 401(k) plans and IRAs, if you are
an individual subject to federal income taxation or a tax-paying entity
and you receive APF Shares, the tax that you must pay will be based on
the difference between the value of the APF Shares you receive and the
tax basis of your units. If you elect to receive notes, your tax will be
based upon your allocable share of the gain which will be recognized by
your Income Fund; your Income Fund's gain will generally equal the
excess, if any, of the value of the APF Shares received by your Income
Fund over the tax basis of your Income Fund's net assets. Some of the
gain may be subject to the 25% rate of tax applicable to certain real
property gain.
Conflicts of and Benefits to General Partners
As a result of the Acquisition and assuming all of the Income Funds are
acquired, we, as the general partners of the Income Funds, will receive
benefits. These benefits include:
. With respect to our ownership in the Income Funds, we may be issued up to
an estimated 138,150 APF Shares in the aggregate in accordance with the
Income Funds' partnership agreements. The APF Shares issued to us will
have an estimated value, based on the exchange value, of approximately
$2,763,000.
. Following the Acquisition, James M. Seneff, Jr. and Robert A. Bourne, as
the individual general partners of your Income Fund, will continue to
serve as directors of APF, with Mr. Seneff serving as the Chairman and
Mr. Bourne serving as Vice Chairman. As APF directors, they may be
entitled to receive stock options under any stock option plan adopted by
APF.
The benefits that may be realized by Messrs. Seneff and Bourne may exceed
the benefits that they would derive from the Income Funds if the Acquisition
does not occur.
10
<PAGE>
The Acquisition
Principal Components of the Acquisition
The Acquisition will consist of the following principal components:
. APF Acquires the Income Funds. APF will acquire, in exchange for APF
Shares, the Income Funds in which Limited Partners holding greater than
50% of the units approve the Acquisition. Consequently, APF will own the
acquired Income Funds' restaurant properties and other assets after the
completion of the Acquisition. The Acquisition will be accomplished by
merging the acquired Income Funds into CNL APF Partners, L.P., a wholly-
owned subsidiary of APF, which we refer to as the Operating Partnership.
. APF Lists the APF Shares on NYSE. APF will provide liquidity and a
trading market for the APF Shares by listing the APF Shares for trading
on the New York Stock Exchange concurrently with the consummation of the
Acquisition.
We expect that the Acquisition will be consummated in the fourth quarter of
1999, and we and APF have required that it be completed no later than March 31,
2000.
In an effort to obtain a greater following by the investment banking analyst
community, concurrently with or shortly following the Acquisition and the
listing of APF Shares on the NYSE, and, assuming market conditions permit, APF
intends to offer APF Shares to the public pursuant to an underwritten public
offering. APF has not yet determined how many APF Shares will be offered for
sale in the public offering or when the offering will commence.
The following charts are intended to reflect the organizational structure
of, and the relationship among APF and Messrs. Seneff and Bourne both before
and after the Acquisition and the acquisitions of the CNL Restaurant
Businesses.
Organization of CNL Restaurant Businesses and Income Funds prior to any
acquisition
[CHART APPEARS HERE]
(1) CNL Group, Inc. is 100% owned by James M. Seneff, Jr. and his wife,
Dayle L. Seneff.
(2) The remaining 5% of CNL Fund Advisors, Inc. is owned by certain members
of management of CNL Fund Advisors, Inc.
(3) The remaining 5% of CNL Financial Corporation is owned by certain
members of management of CNL Financial Corporation.
(4) The remaining 2% of CNL Financial Services, Inc. is owned by certain
members of management of CNL Financial Services, Inc.
11
<PAGE>
Organizational Chart of APF before
the Acquisition and the acquisition of the CNL Restaurant Businesses
[CHART APPEARS HERE]
(1) CNL Group, Inc. is 100% owned by James M. Seneff, Jr. and his wife, Dayle L.
Seneff.
12
<PAGE>
Organizational Chart of APF after
the Acquisition and the acquisition of the CNL Restaurant Business
[CHART APPEARS HERE]
(1) CNL Group, Inc. is 100% owner by James M. Seneff, Jr. and his wife, Dayle L.
Seneff
(2) CFA Acquisition Corp. has merged into CNL Fund Advisors, Inc.
(3) CFS Acquisition Corp. has merged into CNL Financial Services, Inc.
(4) CFC Acquisition Corp. has merged into CNL Financial Corp.
(5) Those Income Funds that approve the Acquision will be merged into CNL APF
Partners, L.P. which will be the surviving entity.
What you will receive if your Income Fund is acquired in the Acquisition
You will receive APF Shares as consideration for your units, unless you vote
against the Acquisition of your Income Fund by APF and elect to receive notes,
as described below.
. APF Shares. The consideration paid to your Income Fund upon the
consummation of the Acquisition will consist of APF Shares, reduced by
the expenses of the Acquisition that are incurred by your Income Fund and
assumed or paid by APF. You will receive APF Shares for your units unless
you vote "Against" the Acquisition and specifically elect to receive the
notes. You should note that if you vote against the Acquisition, and do
not specifically choose to receive the notes, you will receive APF Shares
in the event that your Income Fund approves the Acquisition.
The number of APF Shares that you will receive for your units will be
determined in accordance with your Income Fund's partnership agreement which
specifies how consideration is distributed to partners in the event of a
liquidation of your Income Fund. The next section of this Summary contains a
chart that lists the number and estimated value of APF Shares, based on the
exchange value, to be paid to each Income Fund. As we have previously noted,
the exchange value has been assigned by APF to the APF Shares, and upon
listing the APF Shares on the NYSE, the APF Shares may trade at prices
significantly below the exchange value. We have included in the chart, as a
way to demonstrate the relationship of the APF Shares that will be paid to
your Income Fund to your investment in the Income Funds, the estimated value
of APF Shares per average $10,000 original investment in each Income Fund.
13
<PAGE>
. Notes. If your Income Fund approves the Acquisition and you have voted
"Against" the Acquisition, but you do not wish to own APF Shares, you can
elect to receive your portion of the consideration in 7.0% callable
notes, due , 2004. The payment received by you and other Limited
Partners who elect to receive notes will be equal to 97% of the value of
your portion of the APF Share consideration, based on the exchange value,
that would otherwise have been paid to your Income Fund. The notes will
bear interest at 7.0% and will mature on , 2004. APF may redeem the
notes at any time prior to their maturity at a price equal to the sum of
the outstanding principal balance plus accrued interest.
Consideration Paid to Funds
The following table sets forth information for each Income Fund regarding
the consideration, based on the exchange value, that your Income Fund will
receive in the Acquisition. The data in these tables assumes that none of the
Limited Partners in the Income Fund has elected to receive notes. You should
note that the APF Shares may trade at prices below the exchange value upon
listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited
Partner
Investments
Original less any
Limited Distributions
Partner of Net Sales Estimated Value of
Investments Proceeds per Number of Estimated APF Shares per
less any Average APF Shares Value of APF Estimated Value Average $10,000
Distributions $10,000 Offered to Shares Estimated of APF Shares Original Limited
of Net Sales Original Income Payable to Acquisition after Acquisition Partner
Income Fund Proceeds(1) Investment(1) Fund Income Fund Expenses Expenses Investment
----------- ------------- ------------- ---------- ------------ ----------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
I.................... $12,001,150 $ 8,001 578,880 $11,577,600 $158,000 $11,419,600 $ 7,613
II................... 23,046,408 9,219 1,196,634 23,932,680 295,000 23,637,680 9,455
III.................. 22,253,502 8,901 1,041,451 20,829,020 266,000 20,563,020 8,225
IV................... 28,226,458 9,409 1,334,008 26,680,160 344,000 26,336,160 8,779
V.................... 22,258,862 8,903 1,024,516 20,490,320 240,000 20,250,320 8,100
VI................... 35,000,000 10,000 1,865,194 37,303,880 421,000 36,882,880 10,429
VII.................. 30,000,000 10,000 1,601,186 32,023,720 390,000 31,633,720 10,439
VIII................. 35,000,000 10,000 2,021,318 40,426,360 460,000 39,966,360 11,261
IX................... 35,000,000 10,000 1,850,049 37,000,980 437,000 36,563,980 10,351
X.................... 40,000,000 10,000 2,121,622 42,432,440 481,000 41,951,440 10,390
XI................... 40,000,000 10,000 2,197,098 43,941,960 477,000 43,464,960 10,761
XII.................. 45,000,000 10,000 2,384,248 47,684,960 518,000 47,166,960 10,402
XIII................. 40,000,000 10,000 1,943,093 38,861,860 441,000 38,420,860 9,605
XIV.................. 45,000,000 10,000 2,156,521 43,130,420 475,000 42,655,420 9,479
XV................... 40,000,000 10,000 1,866,951 37,339,020 422,000 36,917,020 9,229
XVI.................. 45,000,000 10,000 2,160,474 43,209,480 473,000 42,736,480 9,497
</TABLE>
- --------
(1) The original Limited Partner investments in CNL Income Fund, Ltd., CNL
Income Fund II, Ltd., CNL Income Fund III, Ltd., CNL Income Fund IV, Ltd.
and CNL Income Fund V, Ltd. were $15,000,000, $25,000,000, $25,000,000,
$30,000,000 and $25,000,000, respectively. These columns reflect, as of
December 31, 1998, an adjustment to the Limited Partners' original
investments based on distributions of net sales proceeds received from
sales of properties (both as a special distribution and those that were
added to working capital and subsequently distributed) for CNL Income Fund,
Ltd. through CNL Income Fund V, Ltd.
Why we are showing a $10,000 original investment. You may have originally
invested more or less than $10,000 in your Income Fund. We used a $10,000
original investment because it is easier to illustrate the purchase prices with
a round number. In order to determine the approximate value, based on the
exchange
14
<PAGE>
value, of APF Shares you will receive if your Income Fund is acquired in the
Acquisition, you would multiply the figure in the last column, which is titled
"Estimated Value of APF Shares per Average $10,000 Original Limited Partner
Investment," by the amount of your original investment divided by $10,000.
Thus, for example, if you originally invested $25,000 in CNL Income Fund XI,
Ltd., you would multiply $10,761 by 2.5, which is equal to $25,000 divided by
$10,000, and which would result in your receiving an estimated value of $26,903
in APF Shares in the Acquisition.
Why the APF Shares may trade at prices below the exchange value. There has
been no public trading market for the APF Shares and it is possible that the
APF Shares will trade, when listed on the NYSE, at below the exchange value.
The principal reasons for this are as follows:
. Upon the listing of the APF Shares on the NYSE, current investors holding
APF Shares, as well as the Income Fund investors who receive APF Shares
in the Acquisition, will for the first time be able to sell these shares
in a relatively liquid market. As a consequence, the supply of APF Shares
offered for sale may exceed the demand for APF Shares, thereby depressing
the trading price of an APF Share. Depending upon market conditions, APF
intends to engage in a public offering of APF Shares concurrently with,
or shortly after, the consummation of the Acquisition in an effort to
obtain the following of investment banking analysts and institutional
investors. APF believes that analyst and institutional investor support
will limit, but will not eliminate, any depression in the trading price
of APF Shares as a result of excess supply.
. While sales of APF Shares, adjusted for the one-for-two reverse stock
split, have been at prices per share equal to the exchange value in all
three of APF's public offerings, a portion of the proceeds raised in
these offerings was used by APF to pay fees and expenses of the
offerings. As of March 31, 1999, book value of an APF Share was $17.59.
It is possible that when the APF Shares begin trading on the NYSE,
trading prices will be below the exchange value to reflect that fact.
. The market prices for the APF Shares may fluctuate with changes in market
and economic conditions, the financial condition of APF and other factors
that generally influence the market prices of securities, including the
market perception of REITs in general. Such fluctuations may
significantly affect liquidity and market prices independent of the
financial performance of APF.
We also will receive APF Shares in the Acquisition. With respect to our
ownership interest in the Income Funds we, as the general partners of your
Income Fund, also will receive APF Shares in exchange for our general partner
interests if Income Funds VI through XII are acquired by APF. If your Income
Fund is acquired, the APF Shares paid to your Income Fund will be allocated
between you and the other investors and us in the same manner as net
liquidation proceeds would be distributed under your Income Fund's partnership
agreement, as if your Income Fund's restaurant properties and other assets were
sold and your Income Fund were distributing net liquidation proceeds.
Our Reasons for Supporting the Acquisition
We are proposing your approval of the Acquisition because we believe that
APF's acquisition of the Income Funds is the best way to maximize the value of
your investment. We believe that the addition of the Income Funds' restaurant
properties to APF's portfolio will likely result in higher values being paid to
the Income Funds than if such restaurant properties were sold individually and
the Income Funds were liquidated.
Benefits of Participation in the Acquisition
We believe that the Acquisition will provide you the following benefits:
. Growth Potential. We believe that there is greater potential for
increased distributions to you as an APF stockholder and for appreciation
in the price of your APF Shares than there would be for you as a
15
<PAGE>
Limited Partner of your Income Fund in holding units. This growth
potential results from future acquisitions of additional restaurant
properties, making mortgage loans and engaging in other financing
activities. In addition, as a result of APF's acquisition of the Advisor,
we believe that the value of APF Shares will be enhanced because we
believe the investing public prefers internally-advised REITs. We believe
that substantial opportunities currently exist to acquire additional
restaurant properties at attractive prices and to make mortgage loans on
favorable terms. Your Income Fund cannot take advantage of such
opportunities because its partnership agreement generally restricts it
from borrowing, making additional acquisitions, developing restaurant
properties and making mortgage loans.
. Risk Diversification. The combination of the restaurant properties owned
by the Income Funds with APF's existing restaurant properties, as well as
future property acquisitions made by APF, will diversify your investment
over a larger number of restaurant properties, a broader group of
restaurant types and tenants and geographic locations. As of March 31,
1999, 88% of APF's tenants were either the franchisor of the restaurant
chain or one of the top five franchisees based on sales of the particular
restaurant chain. Your investment also will become more diversified
because a portion of your investment in APF would be represented by the
mortgage loans that APF makes and by its other financing activities. Your
investment will also change from being an interest in a static, finite-
life entity to an investment in a growing operating company. This
diversification will reduce the dependence of your investment upon the
performance of, and the exposure to the risks associated with, the
particular group of restaurant properties currently owned by your Income
Fund.
. Operational Economies of Scale. The combination of the Income Funds into
the business already owned by APF will result in administrative and
operational economies of scale and cost savings for APF. Particularly
because the Income Funds are all public entities subject to the reporting
requirements of the Securities and Exchange Commission, or SEC, the
combination of the Income Funds into a single public company in APF would
save costs with respect to SEC reporting. In addition, if your Income
Fund is acquired, you will no longer receive a Schedule K-1 for your tax
reporting, which generally was provided to you each February. You will
instead receive a Form 1099-DIV, a much simpler reporting form, which
will be provided to you each January.
. Liquidity. We believe the Acquisition provides you with liquidity of your
investment, which means your APF Shares would be freely-tradable, for two
reasons. First, the market for the units you own is very limited because
the units are not listed on an exchange and, therefore, a potential buyer
has no real basis upon which to value the units. Because your Income
Fund's partnership agreement contains limitations on the transfer of your
units, you may not be able to sell your units even if you were able to
locate a willing buyer. As a stockholder of APF, you will own APF Shares
which will be listed on the NYSE, and therefore publicly valued, and
there will be no restrictions on your ability to sell the APF Shares you
own. Second, as a holder of units that are non-tradable, the pool of
potential buyers for your units is limited and, to the extent that there
is a willing buyer, the buyer would likely acquire your units at a
discount. As a holder of APF Shares, assuming APF acquires all of the
Income Funds, you will be a stockholder of a company that would be
estimated to have total assets of approximately $1.5 billion and more
than 71,000 stockholders and is expected to be one of the largest triple-
net lease REITs in the United States. Therefore, you will likely have the
ability to find several buyers for your APF Shares and, because the APF
Shares are expected to be listed on the NYSE, they will be traded at the
market price.
. Future Development and Mortgage Loan Opportunities. As a result of APF's
acquisition of the CNL Restaurant Businesses, APF acquired restaurant
property development capabilities, mortgage origination, securitization
and loan servicing capabilities. Because APF has acquired these
capabilities, APF now has an additional pool of operators of national and
regional restaurant chains to which it can offer triple-net lease and
mortgage loan financing. APF's current financing commitments with
operators of national and regional restaurant chains either through
triple-net lease financing or mortgage loan
16
<PAGE>
financing are in excess of $427 million. APF is now in the position to
capitalize on these commitments and the corresponding potential to grow
the restaurant development and mortgage financing businesses in the
future. In addition, APF has entered into a 10 year contractual
relationship with CNL Advisory Services, Inc. which gives APF a right of
first refusal to provide financing to CAS clients. CNL Advisory Services,
Inc., an affiliate of CNL Group, Inc., provides merger, acquisition and
strategic planning services to the same operators of national and regional
restaurant chains with which APF does business. APF did not seek to
acquire this company as part of the acquisition of the CNL Restaurant
Businesses because it does not generate income that satisfies the income
tests for REITs under the Internal Revenue Code.
Our recommendation to you
We believe that the terms of the Acquisition provide substantial benefits
and are fair to you. We recommend that you vote "For" the approval of the
Acquisition.
Why we believe the Acquisition is fair to you
We believe that the terms of the Acquisition are fair and that they will
maximize the return on your investment for the following principal reasons:
. We analyzed the benefits of the Acquisition, and we believe that the
expected benefits of the Acquisition to you outweigh the risks and
potential detriments of the Acquisition to you. Some of those benefits
are described above. The risks and potential detriments are discussed
beginning on page 47.
. We reviewed the value of the consideration to be received by you if your
Income Fund is acquired by APF, and we compared it to the consideration
that you might have received under the alternatives to the Acquisition,
including the continuation of the Income Funds without change and the
liquidation of the Income Funds, as described below. We concluded that
the likely value of the APF Shares would be higher than the value of the
consideration you would have received if we had elected one of the other
alternatives.
. We considered that you have the opportunity to vote for or against the
Acquisition, and, if you vote against it, you have the ability to elect
to receive either APF Shares or notes if your Income Fund approves the
Acquisition.
. We considered and concurred with the financial advice and the fairness
opinions rendered by Legg Mason, and the appraisals of Valuation
Associates, each of which is described below on page 18.
. APF raised approximately $750 million in gross proceeds in three
offerings between April 1995, the date of APF's initial public offering,
and December 1998, the date of APF's most recently completed public
offering. In each offering, the offering price per APF Share, after
giving effect to the one-for-two reverse stock split, equaled the
exchange value. The offering price was determined by APF based upon the
estimated costs of investing in restaurant properties and making mortgage
loans, the fees to be paid to CNL Fund Advisors, Inc. and its affiliates,
as well as fees to third parties and the expenses of the offerings.
. Based on recorded transfers of APF Shares, the average price at which APF
Shares sold during 1998 was $17.30 per share, giving effect to the one-
for-two reverse stock split. Because the outstanding APF Shares are
currently unlisted and therefore have no established trading market, we
believe that the average price paid during this period reflects a
discount to the actual value of the APF Shares. Further, through December
31, 1998 pursuant to a redemption plan, APF bought back APF Shares from
stockholders valued at an aggregate of $639,528, based on a value of
$18.40 per APF Share. We believe that this discount to the original
offering price is reasonable in light of the current illiquidity of the
APF Shares. The number of APF Shares transferred and redeemed constituted
less than one percent of the outstanding APF Shares. Upon listing the APF
Shares on the NYSE, we believe that the liquidity afforded to holders of
APF Shares will enhance the value of the APF Shares.
17
<PAGE>
Fairness Opinions
In deciding to recommend the Acquisition, we considered and concurred with
the fairness opinions of Legg Mason as to the fairness from a financial point
of view of the APF Share consideration to be offered to each Income Fund.
Because the Acquisition of any single Income Fund is not a condition of the
Acquisition of any other Income Fund, we obtained from Legg Mason with respect
to each Income Fund a fairness opinion that did not assume that APF acquired
any other Income Funds. The fairness opinion for your Income Fund is attached
as Appendix A to your Income Fund's supplement that accompanies this consent
solicitation. You should read Legg Mason's opinion in its entirety with respect
to the assumptions made, matters considered and limits of the reviews
undertaken by Legg Mason in rendering its opinions.
Based on the analysis more fully described under "Reports, Opinions, and
Appraisals--Fairness Opinions," and subject to the assumptions, limitations and
qualifications discussed in this consent solicitation and in its fairness
opinions, Legg Mason concluded that the APF Share consideration offered to each
Income Fund in the Acquisition is fair from a financial point of view.
Appraisals
In making our recommendation, we also considered the appraisals of each
Income Fund prepared by Valuation Associates, an independent real estate
appraisal firm. We compared the value of the APF Shares payable to each Income
Fund, based on the exchange value, with the appraised value of each Income
Fund's restaurant property portfolio. Based on this comparison, we determined
that the number of APF Shares payable to each Income Fund was reasonable.
Alternatives to the Acquisition that we considered
In determining whether to accept and recommend the Acquisition proposal, we
considered two principal alternatives to the Acquisition that could have been
pursued by each Income Fund: (1) continuation of each Income Fund pursuant to
its existing partnership agreement and (2) liquidation of each Income Fund.
Benefits and Disadvantages of Continuation Alternative. Continuing each
Income Fund without change would have the following effects, some of which you
might perceive as benefits:
. your Income Fund would not be subject to the risks associated with the
ongoing operations of APF and instead would remain a separate entity,
with its own assets and liabilities, and would pursue its original
investment objectives consistent with the guidelines, restrictions and
safeguards contained in its partnership agreement;
. your Income Fund's performance would not be affected by the performance
of APF and the other Income Funds that APF intends to acquire in the
Acquisition;
. eventually, your Income Fund would liquidate its holdings and distribute
the proceeds received in liquidation in accordance with the terms of the
Income Fund's partnership agreement;
. there would be no change in the nature of your voting rights and no
change in your Income Fund's operating policies;
. your Income Fund would not incur Acquisition expenses, ranging from
approximately $158,000 to $518,000, or approximately 1.1% to 1.4% of the
total value of the APF Shares, based on the exchange value, to be issued
to each Income Fund, depending on the size of the Income Fund. For a
breakdown of the expenses with respect to your Income Fund, see the
supplement accompanying this consent solicitation;
. income from your Income Fund may be offset by passive activity losses
generated from your other investments, whereas you will not have the
ability to offset income from your investment in APF with such losses;
and
18
<PAGE>
. assuming you are a tax-paying Limited Partner, you would not be subject
to any immediate federal income taxation that will otherwise be incurred
by you as a consequence of the Acquisition.
However, we believe that maintaining the Income Funds as separate entities
would have the following disadvantages:
. since the Income Funds are not authorized to raise additional funds
either through equity issuances or by incurring indebtedness for
investment, the Income Funds are unable to benefit from investing in
potential growth opportunities;
. your investment would continue to be illiquid because the units are not
freely transferable and there is no established public trading market or
public market valuation for units, unlike the APF Shares which will have
a public trading market that you could access at your discretion;
. your Income Fund's portfolio of restaurant properties would be less
diversified and therefore the loss of one tenant or an economic downturn
in the region where a restaurant property is located would likely have a
greater impact on your Income Fund's ability to make distributions than
it would on APF;
. your Income Fund cannot acquire, develop, or finance restaurant
properties or take advantage of the other potential benefits of the
Acquisition, which are described above; and
. since the majority of the Income Funds' operating expenses are fixed, as
the restaurant properties are sold and revenues from the portfolio
decrease, it is unlikely that all of the Income Funds will sustain their
current level of distributions.
Benefits and Disadvantages of Liquidation Alternative. As an alternative to
the Acquisition, each Income Fund could dissolve and liquidate by selling its
restaurant properties and other assets, paying off its existing liabilities not
assumed by the buyer and distributing the net sales proceeds to you, to the
other Limited Partners and to us in our capacity as general partners in
accordance with the distribution provisions of its partnership agreement. The
primary advantage of this alternative would be to provide liquidity to you as
restaurant properties are sold based upon the net liquidation proceeds received
from the sale of your Income Fund's assets.
We do not believe that liquidation would be as beneficial to you as the
Acquisition, for the following reasons:
. the public market valuation of an investment in an operating real estate
company like APF may exceed the liquidation value of your Income Fund's
restaurant properties;
. we believe that the liquidation valuation provided by Valuation
Associates shows that the liquidation values of the Income Funds are
lower than the values of the APF Shares, based on the exchange value, to
be paid to the Income Funds in the Acquisition; and
. an aggressive bulk sale of individual restaurant properties could result
in significant discounts from appraised values while a gradual
liquidation likely would involve higher administrative costs and greater
uncertainty, either of which would reduce the portion of net sales
proceeds available for distribution to you.
In order to assist you in evaluating these alternatives, please review your
supplement and the section entitled "Background of and Reasons for the
Acquisition--Comparative Valuation Analysis" in this consent solicitation. Your
supplement and that section contain estimates of the value of your investment
if your Income Fund continues in operation without change and of the net
liquidation proceeds that might be available if your Income Fund were
liquidated. The methodology and assumptions used to derive these estimated
values are explained there.
19
<PAGE>
Prices for Income Fund Units
The units are not listed on any national securities exchange or quoted on an
automated quotation system, and there is no established public market for the
units. Set forth in the table below is certain information regarding sale
transactions in the units for the twelve months ended March 31, 1999 that we
obtained from various sources, including the distribution reinvestment plans of
the Income Funds, sales between private individuals and transactions
facilitated by companies that specialize in transacting resales, such as Frain
Asset Management and DCC Securities Corp. Other than the information from the
Income Funds' distribution reinvestment plans, we have not contacted the buyers
or sellers to independently verify this information. There have likely been
other secondary sale transactions in the units, although information regarding
them is not available to us. Sales of units therefore may have occurred at
prices either above the high price or below the low price set forth below.
We are providing you this information so that it is readily available to
you. However, we do not believe you should rely on the information below in
determining whether or not to approve the Acquisition because the price paid
per unit may not accurately reflect the current value of the restaurant
properties and other assets of the Income Funds as a result of the relative
illiquidity of the units being sold.
All historical price information in the chart below is on a per unit basis
for the twelve months ended March 31, 1999. The estimated value of the APF
Shares is based on the exchange value established by APF. The value of the APF
Shares upon listing on the NYSE may be below the exchange value.
<TABLE>
<CAPTION>
Original
Limited
Partner
Investments Estimated
Original less any Weighted Value of APF
Limited Distribution High per Low per Average per Shares per
Partner of Net Sales Number Average Average Average Average
Investments Proceeds per of Units $10,000 $10,000 $10,000 $10,000
less any average Traded Original Original Original Original
Original Distribution $10,000 Number as Percent Limited Limited Limited Limited
Income Cost per of Net Sales Original of Units of Total Partner Partner Partner Partner
Fund Unit Proceeds(1) Investment(1) Traded Income Fund Investment Investment Investment Investment
------ -------- ------------ ------------- -------- ----------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
I............... $500 $12,001,150 $8,001 230 0.7% $8,398 $7,030 $7,085 $7,613
II.............. 500 23,046,408 9,219 317 0.6 9,507 7,100 8,914 9,455
III............. 500 22,253,502 8,901 313 0.6 9,600 6,850 8,698 8,225
IV.............. 500 28,226,458 9,409 534 0.9 10,000 7,600 9,151 8,779
V............... 500 22,258,682 8,903 228 0.5 10,000 6,550 8,704 8,100
VI.............. 500 35,000,000 10,000 921 1.3 9,701 6,660 9,257 10,429
VII............. 1 30,000,000 10,000 317,562 1.1 9,500 7,800 9,400 10,439
VIII............ 1 35,000,000 10,000 481,344 1.4 10,000 7,600 9,300 11,261
IX.............. 10 35,000,000 10,000 37,788 1.1 10,000 8,150 9,330 10,351
X............... 10 40,000,000 10,000 33,703 0.8 9,700 7,800 9,320 10,390
XI.............. 10 40,000,000 10,000 47,760 1.2 9,500 7,980 8,900 10,761
XII............. 10 45,000,000 10,000 39,737 0.9 10,000 7,600 9,220 10,402
XIII............ 10 40,000,000 10,000 39,832 1.0 9,500 7,900 9,030 9,605
XIV............. 10 45,000,000 10,000 27,838 0.6 9,950 7,500 9,140 9,479
XV.............. 10 40,000,000 10,000 25,175 0.6 9,500 6,100 8,580 9,229
XVI............. 10 45,000,000 10,000 38,245 0.8 10,000 8,000 8,950 9,497
</TABLE>
- --------
(1) The original Limited Partner investments in CNL Income Fund, Ltd., CNL
Income Fund II, Ltd., CNL Income Fund III, Ltd., CNL Income Fund IV, Ltd.
and CNL Income Fund V, Ltd. were $15,000,000, $25,000,000, $25,000,000,
$30,000,000 and $25,000,000, respectively. These columns reflect, as of
December 31, 1998, an adjustment to the Limited Partners' original
investments based on distributions of net sales proceeds received from
sales of properties (both as a special distribution and those that were
added to working capital and subsequently distributed) for CNL Income Fund,
Ltd. through CNL Income Fund V, Ltd.
20
<PAGE>
The Restaurant Properties
Assuming that APF acquires all of the Income Funds and that the Acquisition
had occurred on March 31, 1999, APF would have owned and leased on a triple-net
basis 1,087 restaurant properties of which 574 would have been acquired from
the Income Funds. The restaurant properties would be leased to more than 140
tenants, operated by more than 60 different restaurant chains, located in 45
states and approximately 98% leased as of March 31, 1999. The average age of
the buildings on restaurant properties in the portfolio would be approximately
8.5 years. The following table sets forth material restaurant property
information for restaurant properties owned as of March 31, 1999, assuming the
Acquisition occurred on this date, with respect to significant restaurant
chains operating a restaurant property. The annualized revenue includes the
straight-lining of rental income in accordance with generally accepted
accounting principles.
<TABLE>
<CAPTION>
Total Number Average Annualized
of Age of Total Percent of
Restaurant Buildings Rental Total Rental
Restaurant Chain Properties (years) Revenue Revenue
- ---------------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C>
Golden Corral................. 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.
21
<PAGE>
Since the acquisition of one Income Fund is not dependent upon the
acquisition of any other Income Fund, it is possible that APF would not acquire
all of the Income Funds in the Acquisition. Consequently, after the
Acquisition, APF will not necessarily own all of the restaurant properties
listed above.
The following table sets forth the same material restaurant property
information for APF, assuming all of the Income Funds were acquired on March
31, 1999, by tenant for the restaurant properties.
<TABLE>
<CAPTION>
Total Average Percent
Number of Age of Annualized of Total
Restaurant Buildings Total Rental Rental
Tenant Properties (years) Revenue Revenue
- ------ ---------- --------- ------------ --------
<S> <C> <C> <C> <C>
Golden Corral Corporation.......... 91 5.8 $ 11,935,000 11.7%
Foodmaker, Inc. ................... 103 4.7 9,924,000 9.8
S & A Properties Corporation....... 40 19.0 7,402,000 7.3
DenAmerica Corporation............. 54 8.6 4,837,000 4.8
Flagstar Enterprises, Inc. ........ 66 6.8 4,711,000 4.6
IHOP Corporation................... 35 2.5 4,701,000 4.6
Houlihan's Restaurants, Inc. ...... 22 19.5 3,535,000 3.5
Burger King Corporation............ 36 14.0 3,325,000 3.3
Restaurant Management Services,
Inc. ............................. 32 11.5 2,398,000 2.4
Denny's, Inc....................... 23 7.8 2,142,000 2.1
Checkers Drive-In Restaurants,
Inc............................... 47 5.1 2,069,000 2.0
Pollo Operations, Inc. ............ 13 4.8 2,027,000 2.0
Other.............................. 525 8.8 42,557,000 41.9
----- ------------ -----
Total............................ 1,087 $101,563,000 100.0%
===== ============ =====
</TABLE>
22
<PAGE>
Financing Services
APF also provides mortgage loans to operators of national and regional
restaurant chains and upon the acquisition of the CNL Restaurant Financial
Services Group, APF significantly increased its financing capabilities and
added securitization capabilities. Assuming the acquisition of the CNL
Restaurant Businesses, as of March 31, 1999, APF would have originated more
than $573 million in mortgage loans, of which $269 million would have been
securitized. As of March 31, 1999, APF, through its acquisition of the CNL
Restaurant Financial Services Group, would have had $123 million of signed
commitments to originate mortgage loans.
Voting
Voting Procedures
Please mark the enclosed consent form to vote "For" or "Against" approval of
the Acquisition or, if you prefer, you may vote by telephone, according to the
instructions on your consent form. If you have invested in more than one Income
Fund, you will receive only one copy of this consent solicitation and you will
receive a supplement and a consent form for each Income Fund in which you hold
units. Because each Income Fund will vote separately on whether or not to
approve the Acquisition, you must complete one consent form for each Income
Fund in which you are an investor.
If you are voting "Against" the Acquisition, you also should elect on your
consent form whether you would like to receive APF Shares or notes if your
Income Fund is acquired by APF. If your Income Fund approves the Acquisition,
you will receive APF Shares if you vote "Against" the Acquisition but do not
elect specifically to receive notes or you do not vote. You must elect to
receive notes on the consent form or you will receive APF Shares.
Your consent form must be received by Corporate Election Services by 5:00
p.m. Eastern time on , 1999 unless we extend the solicitation period. If
you do not submit a consent form, you will also be counted as having voted
"Against" the Acquisition and will receive APF Shares if your Income Fund
approves the Acquisition. If you submit a properly signed consent form but do
not indicate how you wish to vote, you will be counted as having voted "For"
the Acquisition and will receive APF Shares if your Income Fund approves the
Acquisition. You may withdraw or revoke your consent form at any time prior to
the expiration of the solicitation period in the manner described later in this
consent solicitation. You may also vote in person at the special meeting of the
partners of your Income Fund.
Amendments to Your Income Fund's Partnership Agreement
For Income Funds XI through XVI, if you vote "For" the Acquisition, you will
also be required to cast a separate vote in favor of amendments to the
partnership agreement of such Income Funds. These amendments will authorize
certain actions that are necessary to complete successfully APF's acquisition
of your Income Fund. For a discussion of the amendments, if applicable to your
Fund, you should carefully read the supplement accompanying the consent
solicitation.
No Rights to Independent Appraisal
If your Income Fund approves the Acquisition, but you voted "Against" the
Acquisition, you will not have any right to have an independent valuation of
your Income Fund.
23
<PAGE>
Comparison of Ownership of APF Shares and Units
In order to assist you in deciding whether to approve the Acquisition, we
have summarized below some of the ownership attributes of APF Shares and Income
Fund units. The following descriptions are qualified in their entirety by
reference to APF's Articles of Incorporation and bylaws and to each Income
Fund's partnership agreement. The descriptions are summaries and do not purport
to be a complete discussion of these matters. We encourage you to review
carefully the more detailed comparison regarding the units, the notes and APF
Shares in "Comparison of Ownership of Units, Notes and APF Shares," in this
consent solicitation beginning on page 101, for additional comparisons.
<TABLE>
<CAPTION>
Characteristic Income Fund Units APF Shares
- ----------------------- --------------------------------- ---------------------------------
<S> <C> <C>
General Business . Ownership of restaurant . Ownership, financing,
properties leased to operators development and management of
of national and regional restaurant properties leased on
restaurant chains on a triple- a triple-net lease basis to or
net lease basis. owned by operators of national
and regional restaurant chains.
Other Investment . Various restrictions on the . None; subject to the REIT
Restrictions Income Fund's ability to make limitations on type of income
other investments
Liquidity and . No established market . Traded on NYSE
Transferability
. Transfers are subject to . Freely transferable subject to
limitations ownership limitation
Property Portfolio . Static portfolio; closed-end . Investment flexibility
fund.
. Greater diversification and
ability to grow
. Larger portfolio
Duration . All Income Funds are finite- . Perpetual
life entities with expiration
dates between 2017 and 2031
Federal Taxation . Not subject to federal tax . As a REIT, generally not
subject to federal tax
State Tax Withholding . Some states require withholding . No withholding
on distributions
Tax Characterization of . Generally passive income; pro . Portfolio income; generally,
Income rata share of income and distributions from earnings and
expense items of Income Fund profits reported as ordinary
attributed to partners; income; distributions in excess
distributions in excess of of earnings and profits
taxable income (generally as a (generally as a result of
result of depreciation) are not depreciation), reported as non-
currently taxable and reduce taxable distributions and
taxpayer's basis in the Income reduces taxpayer's basis in
Fund REIT
Tax Reporting . Complicated Schedule K-1, . Form 1099-DIV must be mailed by
generally mailed by February 15 January 31 of each year
of each year
Borrowing . No borrowing. . Currently, APF's policy to
limit borrowing to up to 45% of
total assets
Liability of Investor . Limited to the amount of your . No personal liability for the
investment in the Income Fund debts or obligations of APF
Distributions . Quarterly distributions . Quarterly distributions
Additional . Income Funds cannot issue . APF may issue additional equity
Equity/Potential additional equity; no risk of which would result in the
Dilution dilution dilution of your ownership
interest in APF
Management . Vested in general partners . Vested in board of directors
elected by stockholders
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Characteristic Income Fund Units APF Shares
- -------------------- --------------------------------- ---------------------------------
<S> <C> <C>
Voting . Voting is based upon the . One vote per share. No
ownership interest in the supermajority voting
Income Fund; voting is requirements or anti-takeover
generally permitted only for provisions except as necessary
significant transactions as to meet REIT ownership
provided in the Income Fund's requirements and with respect
partnership agreement and under to certain business
Florida law combinations involving
interested stockholders
Management Fees . Various fees to the Advisor, . No management fees; APF will
our affiliate, which provides pay all management expenses,
the day-to-day management including salaries and other
operation of the Income Fund's compensation payable to its
assets employees
Disposition Fees and . Subordinated fees of 3% of . No disposition fees
Sales Proceeds selling price of restaurant
properties paid to the Advisor,
and we receive a subordinated
share of the sales proceeds
Expenses . All Income Fund's expenses paid . All expenses paid by APF
by Income Fund; general
partners reimbursed for certain
services performed for the
Income Fund
</TABLE>
You should read this consent solicitation carefully and consult with your
own advisor prior to making a decision with respect to the Acquisition.
Acquisition Expenses
APF and each Income Fund will bear their own expenses incurred in connection
with the Acquisition. If your Income Fund approves the Acquisition and your
Income Fund is acquired by APF, the number of APF Shares you receive will
reflect a reduction for your Income Fund's expenses of the Acquisition.
Acquisition expenses are expected to range from 1.1% to 1.4% of the estimated
value of the APF Shares payable to each Income Fund. For a breakdown of the
expenses estimated to be paid in the Acquisition by your Income Fund, please
see the supplement attached to this consent solicitation.
If the Acquisition is rejected by your Income Fund, then your Income Fund
will bear the portion of its Acquisition expenses based upon the percentage of
"For" votes and we, as the general partners of the Income Fund, will bear the
portion of such Acquisition expenses based upon the percentage of "Against"
votes and abstentions.
Conditions to the Acquisition
The following conditions must be satisfied in order for the Acquisition to
be consummated.
. The APF Shares must be listed on the NYSE prior to or concurrently with
the consummation of the Acquisition.
. The stockholders of APF must have approved an increase of the APF Shares
authorized to be issued by APF at a special meeting of APF stockholders
scheduled for , 1999. The increase is necessary in order for APF to
have a sufficient number of shares to acquire the Income Funds.
. If fewer than all of the Income Funds approve the Acquisition, the
Special Committee of APF must receive an additional fairness opinion from
Merrill Lynch & Co. stating that the aggregate consideration payable to
the approving Income Funds is fair to APF from a financial point of view.
25
<PAGE>
As a condition to closing the Acquisition of any Income Fund, the aggregate
amount of notes to be issued to Limited Partners who elect to receive notes may
not exceed 15% of the estimated value of APF Shares payable to such Income Fund
based on the exchange value. To the extent that the aggregate amount of notes
to be issued to the Limited Partners of any Income Fund exceeds this 15%
limitation, APF has the right, pursuant to the terms each Income Fund's merger
agreement, to decline to acquire the Income Fund.
Federal Income Tax Considerations
The Acquisition will be a taxable transaction for Limited Partners subject to
federal income taxation
Currently, the Income Funds are organized as limited partnerships and
treated as partnerships for federal income tax purposes. As partnerships, the
Income Funds are not subject to federal taxation as entities, but instead
function as conduits, with the tax results of their operations required to be
reflected in the personal tax returns of you, the other Limited Partners and
ourselves. If your Income Fund is acquired by APF, you will be required to
recognize taxable gain or loss if you are subject to federal income tax. If you
are an individual or a tax-paying entity, you may be required to pay tax on any
gain recognized but will not receive any cash in the Acquisition in order to
pay those taxes. If APF acquires your Income Fund in the Acquisition, you will
recognize taxable gain or loss whether you elect to receive APF Shares or
notes. The amount of gain or loss that you will recognize will depend upon
whether you or any other Limited Partners elect to receive the notes. If
neither you nor any other Limited Partners in your Income Fund elect to receive
the notes, you will recognize a gain or loss equal to the difference between
the value of the APF Shares that you receive in the Acquisition and the tax
basis in your units. If you elect to receive the notes, your tax will be based
upon the share of the gain recognized by your Income Fund that is allocable to
you. If you are required to recognize any gain as a result of the Acquisition,
you may be able to offset that gain with unused passive activity losses from
your other investments.
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences to
you of the Acquisition.
26
<PAGE>
Taxable Gain and Loss Estimates Per Average $10,000 Original Limited Partner
Investment
The estimated taxable gain and loss, as of March 31, 1999, based on the
exchange value, for an average $10,000 original Limited Partner investment in
an Income Fund, is set forth in the table below for those Limited Partners
subject to federal income taxation.
<TABLE>
<CAPTION>
Estimated Gain/(Loss)
per Average $10,000
Original Limited
Income Fund Partner Investment
- ----------- ---------------------
<S> <C>
CNL Income Fund, Ltd. .................................... $1,868
CNL Income Fund II, Ltd. ................................. 1,374
CNL Income Fund III, Ltd. ................................ 675
CNL Income Fund IV, Ltd. ................................. 808
CNL Income Fund V, Ltd. .................................. 230
CNL Income Fund VI, Ltd. ................................. 1,566
CNL Income Fund VII, Ltd. ................................ 2,300
CNL Income Fund VIII, Ltd. ............................... 2,711
CNL Income Fund IX, Ltd. ................................. 1,786
CNL Income Fund X, Ltd. .................................. 1,673
CNL Income Fund XI, Ltd. ................................. 1,880
CNL Income Fund XII, Ltd. ................................ 1,650
CNL Income Fund XIII, Ltd. ............................... 660
CNL Income Fund XIV, Ltd.................................. 251
CNL Income Fund XV, Ltd. ................................. (140)
CNL Income Fund XVI, Ltd. ................................ 50
</TABLE>
Qualification of APF as a REIT
APF currently qualifies as a REIT under the Internal Revenue Code of 1986,
as amended, and expects to continue to qualify as a REIT following the
consummation of the Acquisition. Accordingly, if your Income Fund is acquired
by APF, you will cease to be a partner in a partnership and will become a
stockholder of a REIT. This change in status will affect the character and
amount of income and loss reportable by you in the future. For instance, income
generated by your Income Fund could be offset against passive activity losses
from your other investments, but income that you receive from APF as a
stockholder cannot be similarly offset. However, income you receive from a REIT
in certain circumstances may be used to offset investment interest expense.
A REIT is a company that combines the capital of many investors to acquire
or provide financing for real estate, offers benefits of a diversified
portfolio under professional management and must pay distributions to investors
of at least 95% of its taxable net income. A REIT typically is not subject to
federal income taxation on its taxable net income, provided specific income tax
requirements are satisfied. This treatment substantially eliminates the
corporate level of the "double taxation" imposed at both the corporate and
stockholder levels that generally results from investments in a corporation.
27
<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, as shown on pages 29 through 34, and for APF, the Income
Funds and the CNL Restaurant Businesses on a pro forma basis, as shown on pages
35 through 45, and should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Financial Statements contained elsewhere in this consent solicitation and the
accompanying supplements. The Pro Forma Combined Financial Data combines
information from the historical consolidated statements of earnings of APF, the
Income Funds and the CNL Restaurant Businesses giving effect to the Acquisition
and the acquisition of the CNL Restaurant Businesses as if the respective
transactions occurred on January 1, 1998 and combines information from the
historical consolidated balance sheet as if the respective transactions
occurred on March 31, 1999.
We are providing the pro forma information for illustrative purposes only.
It does not necessarily reflect what the results of operations or financial
position of APF would have been if the acquisitions had actually occurred on
the dates indicated. This information also does not indicate what APF's future
operating results or consolidated financial position will be. This information
does not reflect certain additional costs associated with the Acquisition which
APF cannot presently estimate.
28
<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>
29
<PAGE>
- --------
* 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.
30
<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.
31
<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.
32
<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>
33
<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>
34
<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>
35
<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 $ 316(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>
36
<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>
37
<PAGE>
(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>
(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
38
<PAGE>
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 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.
39
<PAGE>
(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*............. 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.
40
<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 Acquisition since the agreement and
plan of merger requires that the Advisor and CNL Restaurant Financial
Services Group have no accumulated or current earnings and profits for
federal income tax purposes at the time of the Acquisition.
(y) Represents the elimination by the Income Funds of $1,042,835 in related
party payables recorded as receivables by the Advisor.
41
<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>
42
<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>
43
<PAGE>
(f) Represents the elimination of advisory fees between APF, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,851,004)
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 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
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
44
<PAGE>
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 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.
45
<PAGE>
RISK FACTORS
Before you decide how to vote on the Acquisition, you should be aware that
there are various risks involved in the Acquisition, including those described
below. In addition to the other information included in this consent
solicitation, you should carefully consider the following material risk factors
in determining whether to vote in favor of the Acquisition.
We also caution you that this consent solicitation 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 we believe that APF's expectations
reflected in such forward-looking statements are based on reasonable
assumptions, such expectations may not prove to be correct. Important factors
that could cause such actual results to differ materially from the expectations
reflected in these forward-looking statements include 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
Acquisition and related transactions and increased competitive pressures.
You may be subject to the following risks if you become an
APF stockholder in the Acquisition.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease below the exchange value upon listing.
There has been no prior market for the APF Shares, and it is possible that
the APF Shares may trade at prices substantially below the exchange value or
the historical per share book value of the assets of APF. The APF Shares have
been approved for listing on the NYSE, subject to official notice of issuance.
Prior to listing, the existing APF stockholders have not had an active trading
market in which they could sell their APF Shares. Additionally, any Limited
Partners of the Income Funds who become APF stockholders as a result of the
Acquisition, will have transformed their investment in non-tradable units into
an investment in freely tradable APF Shares. Consequently, some of these
stockholders may choose to sell their APF Shares upon listing at a time when
demand for APF Shares may be relatively low. The market price of the APF Shares
may be volatile after the Acquisition, and the APF Shares could trade at
amounts substantially less than the exchange value as a result of increased
selling activity following issuance of the APF Shares, the interest level of
investors in purchasing the APF Shares after the Acquisition and the amount of
distributions to be paid by APF.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have three material conflicts of interest in the
Acquisition. First, we, James M. Seneff, Jr. and Robert A. Bourne, who also sit
on the Board of Directors of APF, and CNL Realty Corp., an entity whose sole
stockholders are Messrs. Seneff and Bourne, are the three general partners of
the Income Funds. As Board members of APF, Messrs. Seneff and Bourne have a
different interest in the completion of the Acquisition which may conflict with
the interests of the Limited Partners of the Income Funds or with their own
positions as the general partners of the Income Funds. Second, assuming all of
the Income Funds are acquired in the Acquisition, we will receive an aggregate
of 138,150 APF Shares. For information on the number of APF Shares to be paid
to us if your Income Fund is acquired, if any, please see the supplement
relating to that Income Fund accompanying this consent solicitation. Finally,
in the event that one or more Income Funds is not acquired, however, we, as the
general partners of the Income Funds, may be required to pay all or a
substantial portion of the Acquisition costs allocated to such Income Funds to
the extent that you or other Limited Partners of your Income Fund vote against
the Acquisition. When you consider the recommendation of Messrs. Seneff and
Bourne, as the individual general partners of your Income Fund, keep in mind
that their interests may differ significantly from your interests with respect
to the Acquisition.
46
<PAGE>
Existing stockholders will be diluted by the public offering.
Concurrently with or shortly after the Acquisition, APF intends to engage in
an underwritten public offering of APF Shares, if market conditions permit.
This future sale of APF Shares could adversely affect the market price of the
APF Shares. Based on the number of APF Shares outstanding at 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 Acquisition 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, including any APF Shares you receive as a Limited
Partner.
A majority vote of limited partners of Income Funds binds all limited partners.
Each Income Fund will be acquired by APF if the Limited Partners of that
Income Fund who hold a majority in interest of the outstanding units vote in
favor of the Acquisition. Such approval will bind all of the Limited Partners
in the Income Fund, including you or any other Limited Partners who voted
against or abstained from voting with respect to the Acquisition.
Partners have no cash appraisal rights.
If your Income Fund approves the Acquisition and you have voted "Against"
it, and you do not wish to receive APF Shares, you will have the option to
receive five year notes with interest at 7% per year instead, as your portion
of the consideration received by your Income Fund. The amount of notes you will
receive will be equal to 97% of your portion of the APF Share consideration
that would have otherwise been paid to your Income Fund, based on the exchange
value. There likely will be no public market for the notes, and, therefore,
they may sell at prices substantially below their issuance price. As a holder
of notes, you are likely to receive the full face amount of the notes only if
you hold the notes to maturity, which is approximately five years after the
Acquisition, if APF chooses to repay the notes prior to the maturity date in
2004, or to the extent that APF is required to prepay the notes in accordance
with their terms. Because the notes are unsecured obligations of APF, they will
be subordinate to all secured debt of APF. To illustrate what this means, if
you assume that the Acquisition and the acquisition of the CNL Restaurant
Businesses had been consummated on March 31, 1999 and that all of the Income
Funds were acquired, then as of that date, APF would have had aggregate
consolidated secured liabilities of approximately $227 million which APF would
have to repay before repaying the notes.
The size of APF after Acquisition is uncertain.
Although APF is currently an operating company which owns an interest in
1,113 restaurant properties, at the time that you and the other Limited
Partners are asked to vote on the Acquisition, there will be several
uncertainties in the transaction that will preclude you from making a complete
evaluation of it, most importantly, which Income Funds will approve the
Acquisition and be acquired by APF, and thus, which restaurant properties will
be acquired by APF. Such uncertainties will affect the post-Acquisition size
and scope of APF.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition involves a fundamental change in the nature of your
investment. Your investment will change from constituting an interest in one or
more Income Funds, each of which has a fixed portfolio of restaurant properties
in which you participate in the profits from the rental of its restaurant
properties, to holding common stock of APF, an operating company, that will own
and lease on a triple-net basis, assuming all of the Income Funds were acquired
as of March 31, 1999, 1,087 restaurant properties. The risks inherent in
investing in an operating company such as APF include that APF may invest in
new restaurant properties that are not as profitable as APF anticipated, may
incur substantial indebtedness to make future acquisitions of
47
<PAGE>
restaurant properties which it may be unable to repay and may make mortgage
loans to prospective operators of national and regional restaurant chains which
may not have the ability to repay. These risks are more fully discussed below
under "--Real Estate/Business Risks."
Also, an investment in APF may not outperform your investment in an Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale of the Income Fund's
assets, to an investment in an entity in which you may realize the value of
your investment only through sale of your APF Shares, not from liquidation
proceeds from restaurant properties. Continuation of your Income Fund would, on
the other hand, permit you eventually to receive liquidation proceeds, if any,
from the sale of the Income Fund's restaurant properties, and your share of
these sale proceeds could be higher than the amount realized from the sale of
your APF Shares or from payments on any notes, if you elect to receive the
notes.
The loss of a significant tenant would adversely affect APF's income.
S&A Properties Corporation accounted for 10% or more of APF's rental, earned
and interest income for the quarter ended March 31, 1999. Assuming APF had
acquired all of the Income Funds and the CNL Restaurant Businesses, such tenant
would have accounted for 7.14% of APF's combined historical rental, earned and
interest income for the quarter ended March 31, 1999. If S&A Properties
Corporation were to default on its lease obligations or declare bankruptcy, APF
may have significantly reduced rental, earned and interest income until it
could lease the restaurant property or properties to a new tenant or tenants.
Tenants of two significant restaurant chains have filed for bankruptcy
protection.
In October 1998, tenants of 38 Boston Market restaurant properties owned by
APF and the Income Funds filed voluntary petitions for bankruptcy under Chapter
11 of the U.S. Bankruptcy Code. As of 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.
For the quarter ended March 31, 1999 and assuming the acquisition of the CNL
Restaurant Businesses and the Acquisition, Boston Market restaurant properties
represented approximately 6.4% of APF's total rental, earned and interest
income. In June 1998, the tenant of 36 Long John Silver's restaurant properties
of the Income Funds filed a voluntary petition for bankruptcy under Chapter 11
of the U.S. Bankruptcy Code. As of 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.
For the quarter ended March 31, 1999 and assuming the Acquisition of all the
Income Funds, Long John Silver's restaurant properties represented 1.0% of
APF's total rental, earned and interest income.
APF would be required to pay termination fees in its interest rate swap
contracts if it terminates such contracts early.
The CNL Restaurant Financial Services Group has invested, and APF will
continue to invest, in derivative financial securities and instruments for the
sole purpose of providing protection against fluctuations in interest rates
related to its borrowings. From the time that APF's fixed rate loans are
originated until the time that they are sold through a securitization
transaction, APF will hedge against fluctuations in interest rates through the
use of derivative financial instruments. At 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 is subject to several risks associated with its derivative transactions,
including credit risk, legal enforceability risk and basis risks. APF is
exposed to credit loss in the event of nonperformance by the
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counterparties to the interest rate swap contracts. In order to minimize legal
enforceability risk, APF and its counterparties, prior to any derivative
transaction, enter into 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.
Under current tax law, any payment received from derivatives used to hedge
liabilities which were incurred to acquire real estate properties is considered
as qualifying REIT income under the REIT tax requirements. To the extent a
payment is received under a derivative used to hedge an asset, it will not
constitute qualifying REIT income.
An increase in interest rates could adversely affect the price of APF Shares.
Like the Income Funds, APF owns restaurant properties that are subject to
long-term, triple-net leases. APF also makes mortgage loans on restaurant
properties, typically at fixed rates of interest. Accordingly, the public
valuation of APF Shares will likely be based on the earnings derived by APF
from rental and mortgage income with respect to the restaurant properties and
not from the underlying appraised value of the restaurant properties
themselves. For instance, if interest rates are greater than the percentage
return you receive on an APF Share, the price of an APF Share will likely
decrease because potential investors may not be willing to invest in APF Shares
that would yield less than the market rates on interest-bearing securities,
such as bonds. As a result, interest rate fluctuations may affect the value of
your APF Shares, assuming there is an active trading market in the APF Shares.
APF's officers and directors have more limited liability than we do as your
Income Fund's general partners.
As a stockholder of APF, you will have different rights and remedies against
APF, its officers and directors than you have against us, as the general
partners of your Income Fund. The Articles of Incorporation and bylaws of APF
provide that an officer's or director's liability to APF, its stockholders or
third parties for monetary damages may be limited as permitted under Maryland
law. Under Maryland law, the Articles of Incorporation and bylaws, APF
generally is obligated to indemnify its officers and directors for reasonable
expenses that may be incurred in connection with their service to APF. This
indemnification could limit the legal remedies available to APF, to you and to
other stockholders of APF after the Acquisition against any officers or
directors of APF.
As general partners, our fiduciary duties to you as Limited Partners may be
greater than our fiduciary duties as directors of APF to you once you become
APF stockholders.
As the general partners of the Income Funds, we are accountable as
fiduciaries to the Income Funds, and we owe each Income Fund and its Limited
Partners a duty of loyalty and a duty of care and are required to exercise good
faith and fair dealing in conducting the Income Funds' affairs. If your Income
Fund is acquired by APF, James M. Seneff, Jr. and Robert A. Bourne will be
members of the Board of Directors of APF. As directors of APF, their duty is to
perform their job in good faith, in a manner that they reasonably believe to be
in the best interests of APF and with the care of an ordinary prudent person in
a like position. Generally, directors of APF who act in such a manner will not
be liable to APF for monetary damages arising from their activities. Some
courts have suggested that the duties of a general partner to the limited
partners in a limited partnership is greater than the fiduciary duties owed by
a director of a corporation to a stockholder. If this is the case, it is
possible that the standard of care to which Messrs. Seneff and Bourne are held
as directors of APF in which you are a stockholder will be lower than the
standard of care to which they have been held as the general partners of the
Income Fund.
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Lawsuits have been filed against us and APF in connection with the Acquisition.
Over the last several years, business reorganizations involving the
combination of several partnerships into a single entity occasionally have
given rise to investor lawsuits. These lawsuits have involved claims against
the general partners of the partnerships being acquired, the partnerships
themselves and related persons involved in the structuring of, or benefiting
from, the conversion or reorganization, as well as claims against the surviving
entity and its directors and officers. For example, Limited Partners of certain
Income Funds have filed two lawsuits against us and APF alleging, among other
things, breaches of our fiduciary duties in connection with the Acquisition and
that APF aided and abetted us in breaching our fiduciary duty. Such lawsuits
could delay the closing of the Acquisition or result in substantial damage
claims against us, APF and the Operating Partnership. Each Income Fund is
obligated to indemnify us for claims against us arising from our role as
general partner other than to the extent we are guilty of negligence, fraud,
misconduct or breach of fiduciary duty. Because the Operating Partnership will
be acquiring the Income Funds through the Acquisition, APF and the Operating
Partnership indirectly will be subject to the indemnification obligations of
the Income Funds to us and any obligations of the Income Funds to pay damages
to the extent not covered by any available insurance.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
In its acquisition of the CNL Restaurant Businesses, APF acquired the CNL
Restaurant Financial Services Group, which consisted of two affiliated
entities, CNL Financial Services, Inc. and CNL Financial Corp. Prior to its
acquisition, this group made mortgage loans to operators of national and
regional restaurant chains comparable to those who are currently tenants of
APF.
APF will be subject to risks inherent in the business of lending, such as
the risk of default 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. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions, interest rate fluctuations and adverse performance of its loan
portfolio or servicing responsibilities. If APF is unable to access the
securitization market, it would have to retain as assets those mortgage loans
it would otherwise securitize, thereby remaining exposed to the related credit
and repayment risks on such mortgage loans. Under such circumstances, APF would
also have to seek a different source for funding its operations than
securitizations.
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APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized as discussed below.
The retained subordinated interests and interest-only securities that APF holds
in securitizations may not be recoverable under certain conditions.
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 is subordinate to payments that are required to be made to third
party investors in the securitization as well as other transaction related
costs. APF records 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
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's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
March 31, 1999 and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.62x and its ratio of debt-to-total assets was
27.92%. If all of the Income Funds were acquired as of that date, APF's debt
service ratio would have been 5.88x and its ratio of debt-to-total assets would
have been 18.30%. Up through the time immediately prior to the consummation of
the Acquisition, as a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
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APF's ability to incur additional secured debt may reduce the value of the
notes held by former Limited Partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgages. APF
typically does not require that a third party guarantee the obligations of the
tenant or the borrower. The ability of the tenants or borrowers to pay their
obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of any restaurant chain, may adversely affect
the economic viability of the restaurant chain, including but not limited to:
(1) national, regional and local economic conditions (which may be adversely
affected by industry slowdowns, employer relocations, prevailing employment
conditions and other factors), which may reduce consumer demand for the
products offered by APF's customers; (2) local real estate conditions; (3)
changes or weaknesses in specific industry segments; (4) perceptions by
prospective customers of the safety, convenience, services and attractiveness
of the restaurant chain (5) changes in demographics, consumer tastes and
traffic patterns; (6) the ability to obtain and retain capable management; (7)
changes in laws, building codes, similar ordinances and other legal
requirements, including laws increasing the potential liability for
environmental conditions existing on properties; (8) the inability of a
particular restaurant chain's computer system, or that of its franchisor or
vendors, to adequately address Year 2000 issues; (9) increases in operating
expenses; and (10) increases in minimum wages, taxes (including income,
service, real estate and other taxes) or mandatory employee benefits.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funds available for stockholder
distribution.
APF's management believes that it operates in a manner that enables APF to
meet the requirements for qualification as a REIT for federal income tax
purposes and will continue to operate in this manner. A REIT generally is not
subject to federal taxes at the corporate level on income it distributes to its
stockholders, as long as it distributes at least 95% of its taxable income to
its stockholders annually. In addition, the REIT must meet certain asset tests
at the end of each calendar quarter. APF has not requested, and does not plan
to request, a ruling from the Internal Revenue Service, or IRS, that it
qualifies as a REIT. It has received an opinion, however, from its tax counsel,
Shaw Pittman, that it has met the requirements for qualification as a REIT for
its taxable years ended through 1998 and that it is in a position to continue
such qualification. Shaw Pittman's opinion is based upon representations made
by APF regarding relevant factual matters, upon existing provisions of the
Internal Revenue Code of 1986, as amended, applicable regulations issued under
the Code,
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and reported administrative and judicial interpretations of the Code and
regulations, upon Shaw Pittman's review of relevant documents and upon the
assumption that APF will operate in the manner described in this consent
solicitation.
You should be aware, however, that opinions of counsel are not binding on
the IRS or on any court. Furthermore, the conclusions stated in the opinions
are conditioned on, and APF's continued qualification as a REIT will depend on,
APF's management meeting various requirements which are discussed in more
detail under the heading "Federal Income Tax Considerations--Taxation of APF"
beginning on page 180.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as a stockholder, would be reduced substantially for
each of the years involved.
Certain of APF's leases of restaurants where APF does not own the underlying
land may not be considered leases by the IRS, which could result in less
favorable tax consequences.
APF's tax counsel, Shaw Pittman, is of the opinion, based upon certain
assumptions, that the majority of leases of restaurant properties where APF
owns the underlying land constitute leases for federal income tax purposes.
However, with respect to the restaurant properties where APF does not own the
underlying land, Shaw Pittman is unable to render such an opinion. If the lease
of a restaurant property does not constitute a lease for federal income tax
purposes, it will be treated as a financing arrangement. In the opinion of Shaw
Pittman, the income derived from such a financing arrangement would satisfy the
75% and the 95% gross income tests for REIT qualification because it would be
considered to be interest on a loan secured by real property. Nevertheless, the
recharacterization of a lease in this fashion may have an adverse effect on
APF's ability to grow from internally generated funds. In this instance, APF
would not be entitled to claim depreciation deductions with respect to such
restaurant property. APF's inability to deduct depreciation expense would cause
taxable income to increase by an amount equal to the disallowed depreciation
deduction. Because the REIT tax rules require that 95% of all taxable income be
distributed to stockholders, APF would be required to distribute cash that
would otherwise be used to invest in additional restaurant properties and to
make additional mortgage loans.
APF's secured equipment leases are not considered qualified real estate assets
under the REIT rules, and, if APF has secured equipment leases in excess of
certain percentages of its assets, it would violate the REIT rules.
In order to qualify as a REIT, at least 75% of the value of APF's assets
must consist of investments in real estate, investments in other REITs, cash
and cash equivalents and government securities, which we refer to as qualified
real estate assets. APF provides financing for furniture, fixtures and
equipment used at the restaurant through leases or loans. This includes both
kitchen and dining room fixtures and equipment. For federal income tax
purposes, APF's secured equipment leases would not be considered qualified real
estate assets. Therefore, the value of the secured equipment leases, together
with any other property that is not considered a qualified real estate asset,
must represent, in the aggregate, less than 25% of the value of APF's total
assets.
In addition, APF may not own securities in, or make loans to, any one
company that is not a REIT which securities or loans have, in the aggregate, a
value in excess of 5% of the value of APF's total assets. For federal income
tax purposes, the secured equipment leases would be considered loans, and the
value of the secured equipment leases entered into with any particular tenant
under a lease or borrower under a mortgage loan must not represent in excess of
5% of the value of APF's total assets.
The 25% and 5% tests are determined at the end of each calendar quarter. If
at the end of any calendar quarter plus a 30-day cure period, APF fails to
satisfy either test, it will cease to qualify as a REIT.
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If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to certain adjustments that are unique to REITs, a REIT generally
must distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to make sufficient distributions and maintain its
status as a REIT.
Limitations on share ownership required to maintain APF's REIT status may deter
attractive tender offers for APF Shares.
For the purposes of protecting its REIT status, APF's Articles of
Incorporation limit the ownership by any single stockholder of any class of APF
capital stock, including APF Shares, to 9.8% of the issued and outstanding
equity securities. The Articles of Incorporation also prohibit anyone from
buying shares if the purchase would result in APF losing its REIT status. For
example, APF would lose its REIT status if it had fewer than 100 different
stockholders or if five or fewer stockholders, applying certain broad
attribution rules of the Code, owned 50% or more of the APF Shares. These
restrictions may discourage a change in control of APF, deter any attractive
tender offers for APF Shares or limit the opportunity for you or other
stockholders to receive a premium for your APF Shares.
Pending REIT legislation could have an adverse effect on APF's ability to enter
into securitization transactions involving non-mortgage loans.
On April 28, 1999, the Real Estate Investment Trust Modernization Act was
introduced in the House of Representatives by Representative William M. Thomas
of California with the support of over half of the members of the House Ways
and Means Committee. The same legislation was introduced in the Senate on May
14, 1999. If enacted, the proposed legislation would implement a number of
changes to the Code's treatment of REITs.
One of the provisions of this legislation would prohibit APF from holding
securities possessing greater than 10% of the voting power or the value of any
issuer. Because the term "securities" includes loans that are not secured by
real property, APF would not be permitted to make loans with principal amounts
exceeding 10% of the value of a borrower, unless the loans were secured by real
property. This restriction would impact APF's ability to enter into
securitization transactions involving non-mortgage loans. It would also require
APF to dispose of any non-mortgage loans the principal amounts of which
exceeded 10% of the value of their issuers, including, for this purpose, any
equipment leases treated as loans for federal income tax purposes.
It is not clear whether this legislation will be enacted and, if it is,
which provisions will be included and what their effective dates will be.
Additional proposals may be made by the Clinton Administration or by members of
Congress. It is impossible to predict the nature of those proposals, whether
they would be enacted, and their effect on APF. Furthermore, we cannot predict
with certainty that the changes in legislation will not have a material adverse
effect on APF.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same
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level of distributions to its stockholders. In addition, such change may limit
APF's ability to invest in additional restaurant properties and to make
additional mortgage loans.
There are also risk factors related to restaurant properties to which you will
continue to be subject as an APF stockholder.
If your Income Fund approves the Acquisition, you and the other Limited
Partners will be subject to certain of the risks described above, to which you
are not currently exposed as a Limited Partner of your Income Fund. The
following risk factors describe the risks to which you, as a Limited Partner in
an Income Fund, are already exposed, and to which you will continue to be
exposed if your Income Fund approves the Acquisition.
APF may not be able to re-lease restaurant properties upon the expiration of
leases.
The leases of APF's existing restaurant properties expire on dates ranging
from 2002 to 2022. Upon the expiration of a lease, APF may not be able to re-
lease the related restaurant property at a comparable lease rate or without
incurring additional expenses.
Many tenants have purchase rights and rights of first offer which may restrict
APF's control over the sale of the restaurant properties.
A number of the leases of the restaurant properties give the tenant the
right to purchase the restaurant property from APF under certain conditions
negotiated in the lease on a tenant-by-tenant basis. The price at which the
tenant could make the purchase is generally the greater of APF's original cost
plus a designated amount, or fair market value of the restaurant property based
on an appraisal. Although APF would generally receive a price equal to fair
market value of the restaurant property, this right to purchase may prevent APF
from completely controlling the sale of those restaurant properties.
Additionally, a number of the leases give the tenants of the restaurant
properties the right to purchase the related restaurant property from APF on
the same terms as an offer from a third party. Thus, in certain instances, even
if APF receives an offer to purchase a restaurant property from an independent
third party, it may not be able to sell the restaurant property freely without
first offering the property to the tenant. This "right of first offer" presents
another restriction on APF's control over the disposition of the restaurant
properties.
The business of owning and developing real estate properties involves risks.
Like your investment in the Income Funds, if you become a stockholder in
APF, your investment will be subject to the risks of investing in real
property. In general, a downturn in the national or local economy, changes in
the zoning or tax laws or the availability of financing could affect the
performance and value of the restaurant properties. In particular, since APF
leases properties on which restaurant chains operate, you should be aware that
several factors relating to the restaurant business could affect the value of
such properties and the ability of the tenants to pay their rent. For instance,
the increased costs of food products, increased costs of labor or a labor
shortage, fuel shortages, quality of restaurant management, limited alternative
uses for the buildings on the restaurant properties and changing consumer
habits could all adversely affect the restaurant properties. Also, because real
estate is relatively illiquid, APF may not be able to respond promptly to
adverse economic or other conditions by varying its real estate holdings.
Compliance with various environmental laws could be costly to APF.
Various federal, state and local laws subject property owners or operators
to liability for the costs of removal or remediation of 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. The presence of, or the failure to properly remediate
hazardous substances may adversely affect the ability of
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tenants to operate restaurant chains and may hinder APF's ability to borrow
against contaminated properties. Also, the presence of hazardous wastes on a
property could result in personal injury or similar claims by private
plaintiffs. We cannot be sure that future laws or regulations will not impose
an unanticipated material environmental liability on any of the restaurant
properties or that the tenants of the restaurant properties will not affect the
environmental condition of the restaurant properties.
The costs of complying with these environmental laws for APF's restaurant
properties may adversely affect APF's operating costs and the value of the
restaurant properties. In order to comply with the various environmental laws,
APF has obtained satisfactory Phase I environmental site assessments or has
environmental insurance in place for all of the restaurant properties owned by
APF, and APF intends to do the same for all restaurant properties that it
purchases in and following the Acquisition.
Trends in the restaurant industry could adversely affect the performance of the
restaurant chains that lease from APF.
The restaurant chains operated on the restaurant properties are generally
within the fast-food, family-style or casual dining segments of the restaurant
industry. Whether or not fast-food, family-style or casual dining restaurants
are successful will depend largely on the restaurant operators' ability to
adapt to trends in the restaurant industry, including greater competition among
restaurants, the consolidation of fast-food chains, industry overbuilding,
dining patterns, the introduction of new concepts and menu items, the
availability of labor and general economic conditions. The success of a
particular restaurant chain may affect the income that APF derives from its
restaurant properties.
The failure rate of franchised restaurant chains may adversely affect APF's
business.
The chain restaurant business is highly competitive. The principal areas of
competition for restaurant chains are segment, concept, product, price, value,
quality, service and convenience. Increased competition among operators of
national and regional restaurant chains could adversely affect income from a
given restaurant chain, and such a decline in income could have an adverse
affect on an operator's ability to make payments to APF under a lease or loan.
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BACKGROUND OF AND REASONS FOR THE ACQUISITION
Background of the Income Funds
Formation of the Income Funds. During the latter half of the 1980s and
through the first half of the 1990s, we sponsored public offerings of 18
Florida limited partnerships, including the Income Funds, formed to acquire
restaurant properties triple-net leased to restaurant chains. The Income Funds
raised capital of $550 million in 16 registered public offerings and as of
March 31, 1999 had more than 40,000 limited partners.
The table below sets forth the number of restaurant properties owned,
capital raised and distributions made, by each of the Income Funds since such
Income Fund's inception through the quarter ending March 31, 1999:
<TABLE>
<CAPTION>
Total of
Total Distributions
Distributions Estimated and Estimated
to Value of Value
Total Limited Partners APF Shares per of APF Shares Date of Last
Number of Aggregate Per Average Average $10,000 Combined per Admission
Restaurant Distributions $10,000 Limited Original Limited Average $10,000 of Original
Properties Total Capital to Limited Partner Original Partner Limited Partner Partners
Income Fund Owned(1) Raised Partners Investment Investment(2) Investment (Mo./Yr.)
- ----------- ---------- ------------- ------------- ---------------- ---------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CNL Income Fund,
Ltd................ 17 $15,000,000 $19,614,771 $11,512 $ 7,613 $19,125 Dec. 1986
CNL Income Fund II,
Ltd................ 37 25,000,000 28,879,505 11,369 9,455 20,824 Aug. 1987
CNL Income Fund III,
Ltd................ 28 25,000,000 27,127,387 10,673 8,225 18,898 Apr. 1988
CNL Income Fund IV,
Ltd................ 38 30,000,000 29,441,711 9,647 8,779 18,426 Dec. 1988
CNL Income Fund V,
Ltd................ 23 25,000,000 24,106,567 9,509 8,100 17,609 Jun. 1989
CNL Income Fund VI,
Ltd. .............. 42 35,000,000 29,591,726 8,244 10,429 18,673 Jan. 1990
CNL Income Fund VII,
Ltd. .............. 40 30,000,000 23,552,625 7,710 10,439 18,149 Aug. 1990
CNL Income Fund
VIII, Ltd. ........ 36 35,000,000 26,972,143 7,509 11,261 18,770 Mar. 1991
CNL Income Fund IX,
Ltd. .............. 40 35,000,000 23,848,092 6,677 10,351 17,028 Sept. 1991
CNL Income Fund X,
Ltd. .............. 49 40,000,000 25,543,144 6,193 10,390 16,583 Apr. 1992
CNL Income Fund XI,
Ltd. .............. 40 40,000,000 23,090,140 5,630 10,761 16,391 Oct. 1992
CNL Income Fund XII,
Ltd. .............. 48 45,000,000 23,256,295 5,152 10,402 15,554 Apr. 1993
CNL Income Fund
XIII, Ltd. ........ 47 40,000,000 18,578,410 4,662 9,605 14,267 Sept. 1993
CNL Income Fund XIV,
Ltd. .............. 57 45,000,000 18,776,580 4,160 9,479 13,639 Mar. 1994
CNL Income Fund XV,
Ltd. .............. 50 40,000,000 14,765,947 3,801 9,229 13,030 Sept. 1994
CNL Income Fund XVI,
Ltd. .............. 44 45,000,000 14,323,018 3,334 9,497 12,831 Jul. 1995
</TABLE>
- --------
(1) Includes restaurant properties owned through joint ventures or as tenants
in common with affiliates of the Income Funds. 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) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be at prices significantly below the exchange value.
Investment Objectives of Income Funds
For CNL Income Fund, Ltd. through CNL Income Fund VI, Ltd., the primary
investment objectives were to preserve, protect and enhance capital, while
providing:
. the potential for increased income and protection against inflation
through participation in the growth and sales of fast-food restaurant
properties;
. the potential for capital appreciation through real estate ownership; and
. partially tax-sheltered cash distributions commencing in the initial year
of operation.
For CNL Income Fund VII, Ltd. through CNL Income Fund XVI, Ltd., the primary
investment objectives were to preserve, protect and enhance capital, while
providing:
57
<PAGE>
. cash distributions in the initial year of each Income Fund's operations
in amounts that exceed current taxable income because depreciation
deductions attributable to the restaurant properties reduce taxable
income even though depreciation is not a cash expenditure;
. an anticipated minimum level of income through the long-term rental of
restaurant properties to operators of national and regional restaurant
chains;
. percentage rent payments and, typically, automatic increases in the
minimum annual rent; and
. capital appreciation through the potential increase in the value of the
restaurant properties.
Substantially all of the net proceeds from the offerings of the units have
been invested in real estate, except for amounts used as working capital. We
believe that each Income Fund, including yours, has met its objectives of
providing you and the other Limited Partners with increasing cash distributions
from operations and preserving capital. We have not, however, previously sought
to meet the Income Funds' investment objective of liquidating on favorable
terms.
With respect to each Income Fund, we have set forth in the following table
the date of formation of the Income Fund, the original term of the Income Fund
as set forth in the applicable partnership agreement and, the original
anticipated holding period and the years remaining in such period as set forth
in the original offering materials.
<TABLE>
<CAPTION>
Years
Original Remaining in
Anticipated Original
Legal Life of Partnership Holding Anticipated
Income Fund Formed Period Holding
Income Fund (Years) (Mo./Yr.) (Years) Period
- ----------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
CNL Income Fund, Ltd. ..... 40 Nov. 1985 7 to 15 0-1
CNL Income Fund II, Ltd. .. 40 Nov. 1986 7 to 15 0-2
CNL Income Fund III,
Ltd. ..................... 30 Jun. 1987 7 to 15 0-3
CNL Income Fund IV, Ltd. .. 30 Nov. 1987 7 to 15 0-3
CNL Income Fund V, Ltd. ... 30 Aug. 1988 7 to 12 0-1
CNL Income Fund VI, Ltd. .. 30 Aug. 1988 7 to 12 0-1
CNL Income Fund VII,
Ltd. ..................... 30 Aug. 1989 7 to 12 0-2
CNL Income Fund VIII,
Ltd. ..................... 30 Aug. 1989 7 to 12 0-2
CNL Income Fund IX, Ltd. .. 30 Apr. 1990 7 to 12 0-3
CNL Income Fund X, Ltd. ... 30 Apr. 1990 7 to 12 0-3
CNL Income Fund XI, Ltd. .. 40 Aug. 1991 7 to 12 0-4
CNL Income Fund XII,
Ltd. ..................... 40 Aug. 1991 7 to 12 0-4
CNL Income Fund XIII,
Ltd. ..................... 39 Sept. 1992 7 to 12 0-5
CNL Income Fund XIV,
Ltd. ..................... 39 Sept. 1992 7 to 12 0-5
CNL Income Fund XV, Ltd. .. 38 Sept. 1993 7 to 12 1-6
CNL Income Fund XVI,
Ltd. ..................... 38 Sept. 1993 7 to 12 1-6
</TABLE>
Our Efforts to Liquidate the Income Funds
Because, at their inception, we expected your Income Fund and the other
Income Funds to hold their investments for a number of years after their
formation, we, as the general partners of the Income Funds, did not make any
efforts to sell the restaurant properties in the early years of the Income
Funds' existence. Instead, we concentrated our initial efforts on making
suitable investments for the Income Funds, consistent with the Income Funds'
investment policies and restrictions, and managing the restaurant properties
efficiently in order to maximize the cash flow from the restaurant properties.
As the contemplated period for liquidation of the restaurant properties
approached, we began to explore the feasibility of selling the restaurant
properties. We focused on those Income Funds that had less than three years
remaining in their respective original anticipated holding period, CNL Income
Fund, Ltd through CNL Income Fund X, Ltd.
58
<PAGE>
Since 1995, we have considered a variety of alternative approaches to
liquidating the Income Funds that have entered into their anticipated time
frame for liquidation. Throughout this period, we also considered the
possibility of selling individual restaurant properties to third parties. While
some Income Funds have sold restaurant properties, we concluded that the
process of selling the restaurant properties individually would take an
extended period of time and that some of the restaurant properties might be
difficult to sell at fair prices. If we chose to sell the restaurant properties
individually, the Income Funds would continue to be responsible for all the
costs of maintaining the Income Funds as public companies during that process,
including accounting and SEC reporting requirements and other administrative
costs. We believe that the cost of operating the Income Funds over the time
period necessary to sell the restaurant properties individually would
ultimately reduce the net proceeds to you and the other Limited Partners.
From May 1992 through March 31, 1999, the Income Funds have sold 104
restaurant properties for total consideration of approximately $84.2 million.
These sales were made in connection with the exercise of tenant purchase
options and other opportunities deemed by us to be advantageous for a
particular Income Fund.
We also considered the alternative of selling the entire portfolio of
restaurant properties for a given Income Fund in either a bulk sale to an
unaffiliated third party or in an orderly liquidation. This alternative was not
pursued because we concluded that APF's offer would maximize the returns on
your investment for the following reasons:
. APF is a full-service real estate investment trust, whose primary
business is the ownership of restaurant properties leased to operators of
national and regional restaurant chains on a triple-net lease basis, and
it also provides the value-added services of mortgage financing, site
selection, real estate development and asset management for operators of
national and regional restaurant chains;
. APF, through its acquisition of the Advisor, is most familiar with the
characteristics of the Income Funds and their operations and is in the
best position to value accurately each Income Fund's restaurant property
portfolio;
. prior to listing on the NYSE, it is APF's strategy to increase
substantially the size of its portfolio of restaurant properties through
acquiring portfolios of restaurant properties similar to those owned by
the Income Funds; and
. in our view, liquidation of the restaurant properties would be premature
and could result in various adverse consequences. Specifically, we
believe that (1) the liquidation valuation provided by Valuation
Associates shows that the liquidation values of the Income Funds are
lower than the value of the APF Shares, based on the exchange value, to
be paid to the Income Funds in the Acquisition and (2) an aggressive bulk
sale of individual restaurant properties could result in significant
discounts from appraised values while a gradual liquidation likely would
involve higher administrative costs and greater uncertainty, either of
which would reduce the portion of net sales proceeds available for
distribution to you.
Chronology of the Acquisition
In December 1997, APF's management, which includes Messrs. Seneff and
Bourne, each of whom is a general partner of the Income Funds, CNL Income Fund
XVII, Ltd., CNL Income Fund XVIII, Ltd., and the CNL Income and Growth Funds
began exploring the following strategic alternatives designed to increase APF's
stockholder value:
. continuing to operate APF in its ordinary course of business and
consistent with past practice;
. considering whether APF should be acquired by a publicly-traded or
private company;
. selling APF's entire real estate portfolio and subsequently liquidating;
. acquiring large real estate portfolios, including the Income Funds, CNL
Income Funds XVII and XVIII and eight CNL Income & Growth Funds, which we
refer to as the Growth Funds, and other affiliated entities which have
comparable properties leased on a triple-net basis;
59
<PAGE>
. 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 CNL Advisory Services, Inc., 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 investment banking
firms that would potentially represent APF in the implementation of any
strategic alternative to two, Merrill Lynch and Salomon Smith Barney Inc.
On April 15, 1998, members of APF's management and representatives of Shaw
Pittman met to discuss the structuring of particular strategic alternatives and
the time tables necessary to implement such strategic alternatives.
On May 4, 1998, APF's Board of Directors decided to evaluate the
implementation of one or more of the strategic alternatives. In addition to the
members of the Board, representatives of Shaw Pittman were present at the
meeting. Upon completion of the Board's discussion regarding the expansion of
APF's business operations, the Board established a Special Committee of the
Board of Directors to consider the implementation of any strategic alternative.
The Special Committee consisted of Mr. G. Richard Hostetter, Dr. Richard C.
Huseman and Mr. J. Joseph Kruse, each being an independent member of APF's
Board of Directors having no financial interest in the implementation of any
strategic alternative.
On May 4, 1998, the Special Committee met for the first time. In addition to
the members of the Special Committee, representatives of Shaw Pittman, Merrill
Lynch and Salomon Smith Barney were present at the meeting. The Special
Committee heard presentations from representatives of Merrill Lynch and Salomon
Smith Barney regarding their qualifications to advise the Special Committee on
the merits of implementing one or more of the strategic alternatives. In
addition to the oral presentations made by Merrill Lynch and Salomon Smith
Barney, the Special Committee reviewed the written presentations prepared by
the two other investment banking firms that APF's management had interviewed
during the week of February 9.
Upon hearing the oral presentations of Merrill Lynch and Salomon Smith
Barney and reviewing the written presentations of two other investment banking
firms, the Special Committee determined that it was in the best interests of
APF to select Merrill Lynch and Salomon Smith Barney as their financial
advisors for the purposes of determining whether to implement one or more of
the strategic alternatives.
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
60
<PAGE>
to discuss the various strategic alternatives and the time frames for
implementation of any of the strategic alternatives. Representatives at the
meeting discussed extensively the structure of APF's potential acquisition of
the Income Funds, CNL Income Funds XVII and XVIII and the Growth Funds, with
particular emphasis on the tax considerations to the limited partners of those
funds. The three structures that were discussed at length are summarized as
follows:
. Tax-Free OP Unit Structure. This structure would involve acquiring the
Income Funds, CNL Income Funds XVII and XVIII and the Growth Funds by
exchanging units of limited partnership interest in the Operating
Partnership for units of limited partnership in the Income Funds, CNL
Income Funds XVII and XVIII and the Growth Funds. A transaction
structured in this manner would be tax free to the limited partners of
the Income Funds, CNL Income Funds XVII and XVIII and the Growth Funds
and the former limited partners would become limited partners of the
Operating Partnership. The units of limited partnership of the Operating
Partnership would be convertible on a one-for-one basis into APF Shares.
. Taxable Stock Structure. This structure would involve acquiring the
Income Funds, CNL Income Funds XVII and XVIII and the Growth Funds
through the issuance of APF Shares. A transaction structured in this
manner would be taxable to the limited partners of the Income Funds, CNL
Income Funds XVII and XVIII and the Growth Funds.
. Tax-Free NewCo Structure. This structure would involve forming a new
company and combining APF, the Income Funds, CNL Income Funds XVII and
XVIII and the Growth Funds into the new company in exchange for shares of
common stock of the new company. A transaction structured in this manner
could be tax free to the limited partners of the Income Funds, CNL Income
Funds XVII and XVIII and the Growth Funds but would require that,
immediately following the Acquisition, the limited partners own at least
80% of the total combined voting power of all classes of APF voting stock
and at least 80% of the total number of APF Shares and that APF obtain a
private letter ruling from the IRS regarding the tax-free nature of the
transaction.
On June 10, 1998, the Special Committee met for the second time. In addition
to the members of the Special Committee, representatives of APF management,
Shaw Pittman, Merrill Lynch, Salomon Smith Barney and Rogers & Wells were
present at the meeting. The primary purpose of the meeting was to obtain an
update from Merrill Lynch and Salomon Smith Barney regarding their evaluation
of and recommendation to implement the strategic alternatives. Representatives
of Merrill Lynch and Salomon Smith Barney stated that they had completed their
due diligence of APF, the Income Funds, CNL Income Funds XVII and XVIII and
Growth Funds, but that they were not in the position to provide a
recommendation as to the implementation of any strategic alternative for APF.
On July 8, 1998, the Special Committee met for the third time by telephone.
In addition to the members of the Special Committee, present by telephone at
the meeting were representatives of APF management, Shaw Pittman, Merrill
Lynch, Salomon Smith Barney and Rogers & Wells. The primary purpose of the
meeting was to obtain an update from Merrill Lynch and Salomon Smith Barney
regarding their evaluation of and recommendation to implement one or more of
the strategic alternatives. Merrill Lynch and Salomon Smith Barney stated that
they would be in a position by July 17th to present their analysis and
conclusions of the strategic alternatives to the Special Committee.
On July 17, 1998, the Special Committee met for the fourth time. In addition
to the members of the Special Committee, representatives of APF's management,
including Messrs. Seneff and Bourne, Shaw Pittman, Merrill Lynch and Salomon
Smith Barney were present at the meeting. Merrill Lynch and Salomon Smith
Barney presented their analysis of the strategic alternatives which included
the advantages and disadvantages of each strategic alternative and the
methodologies employed to evaluate the strategic alternatives. After a lengthy
discussion among the members of the Special Committee and representatives of
Merrill Lynch and Salomon Smith Barney, Merrill Lynch and Salomon Smith Barney
concluded that acquiring the Income Funds, CNL Income Funds XVII and XVIII and
Growth Funds, acquiring the CNL Restaurant
61
<PAGE>
Businesses and listing the APF Shares were the strategic alternatives most
likely to maximize APF stockholder value. Mr. Hostetter, the Chairman of the
Special Committee, suggested that the members of the Special Committee further
consider Merrill Lynch's and Salomon Smith Barney's evaluation of the strategic
alternatives and that the Special Committee reconvene on July 20.
On July 20, 1998, the Special Committee met for the fifth time by telephone.
Representatives of Shaw Pittman participated by telephone. After discussing the
Merrill Lynch and Salomon Smith Barney recommendation, the Special Committee
unanimously concluded that the best means to maximize stockholder value would
be for APF to:
. significantly increase its size by acquiring from affiliates of the
Advisor, including the Income Funds, CNL Income Funds XVII and XVIII and
the Growth Funds, portfolios of properties similar to those currently
held by APF;
. become internally advised and acquire internal real estate development
capability by acquiring the Advisor;
. expand its mortgage lending capabilities and develop securitization
capabilities by acquiring the CNL Restaurant Financial Services Group;
and
. list APF's common stock on a national stock exchange, if market
conditions are favorable.
On July 24, 1998, the Special Committee presented its findings to APF's full
Board of Directors and recommended that APF implement the selected strategic
alternatives approved by the Special Committee at the July 20th meeting.
Further, the Special Committee recommended that the Board evaluate the
feasibility of engaging in an underwritten public offering of APF Shares
concurrently with listing. After substantial discussion among the members of
the Board, the Board of Directors unanimously recommended that APF implement
the strategic alternatives. In addition, the Board unanimously recommended that
Merrill Lynch be retained by the Special Committee APF to provide a fairness
opinion to the Special Committee of APF that the consideration to be paid by
APF in connection with the implementation of any applicable strategic
alternative would be fair to APF from a financial point of view.
During the week of September 7, 1998, representatives of APF management,
Merrill Lynch, Salomon Smith Barney, Shaw Pittman, Rogers & Wells and
PricewaterhouseCoopers LLP, APF's independent accountants, gathered for a two-
day meeting to discuss the implementation of the selected strategic
alternatives. During the first day of meetings, the primary focus emphasized
the manner in which the Income Funds, CNL Income Funds XVII and XVIII and the
Growth Funds could be acquired. The principal structures discussed were the
Tax-Free OP Unit Structure, the Taxable Stock Structure and the Tax-Free NewCo
Structure each of which are described above in the description of the May 20th
meeting.
With respect to the Tax-Free OP Unit Structure, the representatives at the
meeting discussed at length the benefits of providing the limited partners of
the Income Funds, CNL Income Funds XVII and XVIII and Growth Funds with a tax
efficient transaction. However, because the number of limited partners of the
Operating Partnership would likely exceed 100, and their partnership interests
would be convertible into stock traded on an established securities market, the
Operating Partnership would be deemed a "publicly-traded partnership" which
would result in the imposition of additional restrictions on the manner in
which APF could operate its business. Representatives of Shaw Pittman were
particularly concerned that APF may lose its ability to qualify as a REIT in
the event that one or more of the restrictions imposed was violated. In
addition, the fact that the Operating Partnership would have greater than 500
limited partners would impose additional reporting requirements under the SEC
rules and would result in a loss of certain operating efficiencies that APF was
attempting to achieve as a result of the proposed Acquisition. While APF and
its counsel could meet the SEC's reporting requirements, the representatives of
APF viewed the administrative burdens of compliance negatively, because in
addition to complying with the SEC rules, APF would have the additional expense
of providing IRS Forms K-1 to the limited partners of the Operating
Partnership. The representatives of Shaw Pittman also noted that, based on
information from APF's management, the taxes that would likely be incurred by
the Limited
62
<PAGE>
Partners of the Income Funds and CNL Income Funds XVII and XVIII if the Taxable
Stock Structure were used would not be substantial, particularly since a number
of the limited partners were tax-exempt entities. Finally, representatives of
Merrill Lynch and Salomon Smith Barney expressed concerns that having a large
number of Operating Partnership unit holders may have an adverse impact on the
APF Shares as a result of APF Shares flooding the market once the Acquisition
closes, if the holders of Operating Partnership units convert their units into
APF Shares. The underwriters noted that, in order to protect against this
"overhang" concern, companies generally prevent holders of units of operating
partnerships from converting for a period of time, typically one year, for the
purpose of allowing the market to stabilize. Members of APF's management
expressed concern that a lock-up period would not be viewed favorably by the
limited partners of the Income Funds, CNL Income Funds XVII and XVIII and the
Growth Funds.
With respect to the Tax-Free NewCo Structure, representatives at the meeting
discussed at length the ability to obtain a favorable private letter ruling
from the IRS regarding the tax-free treatment of Tax-Free NewCo Structure and
the delay that would be caused in the event that the IRS ruled against tax-free
treatment or failed to provide a ruling in a timely manner. Representatives of
Shaw Pittman believed that the acquisition of the Advisor, the CNL Restaurant
Financial Services Group and the Growth Funds for various technical reasons
reduced, but did not eliminate, the likelihood of receiving a favorable ruling.
Additionally, the representatives of Shaw Pittman noted, based on information
from APF's management, that the taxes to be imposed if the Taxable Stock
Structure were used, would not be substantial for the Limited Partners of the
Income Funds and CNL Income Funds XVII and XVIII, particularly since a number
of the Limited Partners were tax-exempt entities. Overall, while Shaw Pittman
viewed favorably the ability of APF to accomplish the Tax-Free NewCo Structure
in a tax efficient manner for the limited partners of the Income Funds and the
Growth Funds, the potential delay that might be incurred as a result of seeking
a favorable ruling from the IRS and the complexity of describing the Tax-Free
NewCo Structure was viewed negatively by Shaw Pittman and the other
representatives at the meeting.
With respect to the Taxable Stock Structure, the representatives at the
meeting weighed the disadvantages of structuring the transaction as a taxable
transaction for the limited partners. In evaluating the tax consequences to the
limited partners, members of APF's management remarked that the taxable gain
that would be recognized by the limited partners would not be significant for
limited partners in most of the Income Funds and CNL Income Funds XVII and
XVIII and that a substantial number of limited partners in the Income Funds and
CNL Income Funds XVII and XVIII would incur no taxable gain because of their
status as a tax-exempt entity. In addition, members of APF's management
discussed the fact that a former limited partner would have the immediate
opportunity to sell the APF Shares that he, she or it received on the open
market in order to pay his, her or its tax liability, if the tax circumstances
necessitated such a sale. The primary benefit discussed by the group was that
the transaction was straightforward and immediately created a larger
stockholder base in the APF Shares. In addition, members of APF's management
noted that if the tax consequences were too severe for a particular Income
Fund, including CNL Income Funds XVII and XVIII, or Growth Fund, the limited
partners had the option of rejecting the proposed Acquisition. Finally, members
of APF's management noted that the acquisition costs and the future reporting
costs of APF in structuring the transaction as a Taxable Stock Structure would
be less and therefore in the best interests of APF's existing stockholders.
After the discussions of the advantages and disadvantages of each possible
structure for the Acquisition, the representatives of APF selected the Taxable
Stock Structure, which is the structure of the Acquisition.
The remaining portions of the meetings during the week of September 7, 1998
dealt primarily with valuation techniques and methodologies of the Income Funds
and the CNL Restaurant Businesses and the timelines and responsibilities of
each of the representatives.
On November 6, 1998, the members of the Special Committee met telephonically
to discuss with members of APF's management and their legal counsel the status
of determining the prices to be paid to the CNL Restaurant Businesses, the
Income Funds, CNL Income Funds XVII and XVIII and the Growth Funds in
connection with the Acquisition. In addition, Shaw Pittman provided to the
members of the Special Committee
63
<PAGE>
an oral summary of all significant matters regarding the progress of the
transactions, including the SEC review process, the documentation necessary to
get the transactions approved and completed, and a range of timelines regarding
when the Acquisition and the acquisition of the CNL Restaurant Businesses would
be concluded.
On November 16, 1998, the members of the Special Committee, members of APF's
management, Merrill Lynch and Salomon Smith Barney met, some in Orlando and
some telephonically, to discuss the status of determining the prices to be paid
to the Income Funds, CNL Income Funds XVII and XVIII and the Growth Funds in
connection with the Acquisition and the methodologies utilized in determining
the prices to be paid.
During the week of November 23, 1998, representatives of APF management,
Merrill Lynch, Salomon Smith Barney, Shaw Pittman and PricewaterhouseCoopers
gathered for a two-day meeting. The primary purpose of the meeting was to
provide APF's legal, accounting and financial advisors with an overview,
operational as well as financial, of the Advisor, the CNL Restaurant Financial
Services Group, the Income Funds, CNL Income Funds XVII and XVIII and the
Growth Funds.
On December 1, 1998, representatives of APF, Shaw Pittman, Merrill Lynch and
Salomon Smith Barney discussed the viability of acquiring the Growth Funds.
Because the Growth Funds produce income that would not be considered qualified
REIT income and therefore could restrict APF's ability to qualify as a REIT,
the inclusion of the Growth Funds in the Acquisition created additional
complexities for APF. These complexities affected APF's ability to value the
Growth Funds because, for federal tax purposes, 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 utilizing the Taxable Stock Structure, the
reduced valuation of the Growth Funds as a result of the necessity of placing
assets that would not generate good REIT income in entities not controlled by
APF and the additional costs to APF of removing the assets out of the Growth
Funds for inclusion in the entities not controlled by APF, the representatives
of APF concluded that it would be in the best interests of APF's stockholders
not to pursue the acquisition of the Growth Funds at this time.
Following the decision to exclude the Growth Funds from the Acquisition,
representatives of Merrill Lynch and Salomon Smith Barney presented their
valuations of the Advisor, the CNL Restaurant Financial Services Group, the
Income Funds and CNL Income Funds XVII and XVIII to the members of the Special
Committee and the full Board. At such time, the members of the Special
Committee unanimously recommended to the full Board that the Board approve the
Acquisition and that the consideration payable to the Income Funds and CNL
Income Funds XVII and XVIII be $600,000,000 or 30,000,000 APF Shares, based on
the exchange value. The members of the full Board unanimously approved the
Special Committee's recommendation.
On December 1, 1998, APF presented us with its offer to acquire the Income
Funds and CNL Income Funds XVII and XVIII for an aggregate of 30,000,000 APF
Shares which APF valued at $600,000,000, based on the exchange value.
On January 27, 1999, the Special Committee of the Board of Directors
received a counter-offer from us proposing an increase in the consideration
payable to the Income Funds and CNL Income Funds XVII and XVIII from
$600,000,000 to $610,000,000, or from 30,000,000 APF Shares to 30,500,000 APF
Shares based on the exchange value. After discussing the proposed counter-
offer, the Special Committee unanimously agreed to accept our counter-proposal,
provided that the fairness opinion from Merrill Lynch to be presented at the
February 10, 1999 meeting of the Special Committee of the Board of Directors
supported the Special Committee's acceptance of the counter-offer of the
consideration to be paid to the Income Funds and CNL Income Funds XVII and
XVIII and the Advisor based on the exchange value.
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On February 10, 1999, Merrill Lynch provided an oral and written fairness
opinion to the Special Committee stating that the aggregate consideration to be
paid by APF for the Acquisition of the Income Funds and CNL Income Funds XVII
and XVIII was fair to APF from a financial point of view.
On March 11, 1999, APF entered into 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. The plaintiffs are seeking unspecified damages. In
addition, the plaintiffs are seeking equitable relief that would enjoin the
proposed Acquisition.
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 we,
as general partners of the Income Funds, met to discuss concerns regarding the
proposed Acquisition. We had received a number of comments from brokers who
sold CNL Income Funds XVII and XVIII. The primary comments concerned the loss
of passive income treatment in the event that CNL Income Funds XVII and XVIII
were acquired in the Acquisition. While it was acknowledged that limited
partners in the Income Funds and CNL Income Funds XVII and XVIII would lose
passive income treatment, the limited partners in CNL Income Funds XVII and
XVIII who purchased their interests in these Income Funds had the option of
acquiring APF Shares at the time of their investment but instead elected to
invest in CNL Income Funds XVII and XVIII. Because of these comments, we
discussed the possibility of potentially restructuring the Acquisition in a
manner to permit the limited partners in CNL Income Funds XVII and XVIII to
retain passive income treatment. In light of our observations, representatives
of APF expressed two primary concerns. First, they were concerned about the
impact of alienating the limited partners in these two CNL Income Funds.
Specifically, they discussed the impact on their ability to acquire the other
16 Income Funds, since 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 negative impact on acquiring the other 16 Income Funds, including
significantly delaying the SEC's review process.
Representatives of APF asked representatives of Shaw Pittman to outline the
different alternatives. Representatives of Shaw Pittman noted three
alternatives:
. Alternative One: Leave the structure of the Acquisition unchanged.
Representatives of Shaw Pittman stated that in order for any Income Fund
to be acquired, holders of greater than 50% of the outstanding
partnership units had to approve the transaction. Therefore, there was no
assurance that either CNL Income Fund XVII or XVIII would be acquired.
Messrs. Seneff and Bourne acknowledged that a majority vote was required.
However, they also noted that because a large number of limited partners
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are tax exempt entities, their vote for or against the Acquisition would
not be affected by the availability of passive treatment.
. Alternative Two: Leave CNL Income Funds XVII and XVIII out of the
Acquisition. Representatives of Shaw Pittman stated that leaving Income
Funds XVII and XVIII out of the Acquisition would potentially satisfy the
concerns of both the general partners and APF.
. Alternative Three: Do an exchange offer for CNL Income Funds XVII and
XVIII instead of the Acquisition. Representatives of Shaw Pittman noted
that an exchange offer would permit limited partners who desire to remain
limited partners of CNL Income Funds XVII and XVIII to retain their
interests in CNL Income Funds XVII and XVIII while permitting other
limited partners to elect to receive APF Shares. The Operating
Partnership would become a limited partner of CNL Income Funds XVII and
XVIII and the remaining limited partners would receive distributions
based solely on the operations of the restaurant properties remaining in
CNL Income Funds XVII and XVIII. In effect, CNL Income Funds XVII and
XVIII would continue to exist. Representatives of Shaw Pittman noted,
however, that APF would not achieve the operating efficiencies it desired
from acquiring all of the CNL Income Funds, including CNL Income Funds
XVII and XVIII, that it would not be able to leverage the portfolios in
these CNL Income Funds XVII and XVIII and that the change in structure
may result in a delay in the SEC review process.
APF deferred to a later date a decision to implement one of the
alternatives discussed above or any other alternative.
We then proceeded to discuss the consideration that would go to dissenting
Limited Partners. At the time of this meeting, APF had offered dissenting
Limited Partners the right to elect a form of cash/notes option. This option
permitted a dissenting Limited Partner the right to receive their proportion
of the consideration based on the liquidation value determined by Valuation
Associates in the form of 10% cash and 90% notes. The notes were to pay
interest at a rate equal to 120% of the applicable federal rate. We had also
received comments that the notes were not as favorable as Limited Partners
would like and asked if APF could improve the terms. While we acknowledged
that the notes were intended for dissenting limited partners, they reiterated
that the broker/dealer community and the Limited Partners had expressed
concerns regarding the terms. Representatives of APF noted that to the extent
that Limited Partners elect to receive notes, APF's results of operations were
positively affected. After discussions among the members of APF's management,
APF proposed to eliminate the 10% cash component, raise the interest rate to
seven percent, decrease the maturation period to five years and base the
amount of notes that a dissenting Limited Partner would receive on 97% of the
APF Shares the investor would have received had such investor not voted
against the Acquisition, based on the exchange value. The representatives of
APF noted that the three percent discount was fair because most Limited
Partners who elected to receive APF Shares would have to pay commissions in
connection with their subsequent sale of APF Shares after the consummation of
the Acquisition.
We accepted APF's offer to change the terms of the notes.
On June 1, 1999, we, on behalf of CNL Income Funds XVII and XVIII,
representatives of APF and representatives of Shaw Pittman met telephonically
to discuss the alternatives discussed at the May 19th meeting regarding CNL
Income Funds XVII and XVIII. Each alternative was discussed extensively in
light of our concerns regarding protection of passive income treatment and
APF's concerns regarding delaying the Acquisition or negatively impacting the
vote of the other Income Funds as a result of CNL Income Funds XVII and XVIII.
On June 3, 1999, we, 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 CNL Income Funds XVII and XVIII
in the Acquisition. Notwithstanding this agreement, representatives of APF
stated that they would, depending on market conditions, seek to acquire CNL
Income Funds XVII and XVIII
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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 us for CNL
Income Funds XVII and XVIII.
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 we breached our
fiduciary duties and the APF aided and abetted our breach of fiduciary duties
in connection with the Acquisition. The plaintiff is seeking unspecified
damages. In addition, the plaintiff is seeking equitable relief that would
enjoin the proposed Acquisition.
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 exchange value.
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.
Background of our recommendation that the Income Funds be acquired by APF
After APF's public announcement on July 27, 1998 that it intended to
increase its portfolio of assets by acquiring affiliates of the Advisor,
including the Income Funds and CNL Income Funds XVII and XVIII, we anticipated
that we might receive an offer from APF to purchase the Income Funds and CNL
Income Funds XVII and XVIII in the near future. As a result of this
expectation, we began a search for outside legal counsel and investment
bankers.
During August 1998, we interviewed two investment banking firms, including
Legg Mason, to provide financial advice and to render fairness opinions to us
in connection with the Acquisition.
In September 1998, we engaged Baker & Hostetler LLP as legal counsel to the
Income Funds and CNL Income Funds XVII and XVIII in the event APF offered to
acquire one or more of the Income Funds and CNL Income Funds XVII and XVIII.
Baker & Hostetler had previously served as securities counsel for CNL Income
Funds XVII and XVIII.
In September 1998, we engaged Valuation Associates to (1) complete a
restaurant property-by-restaurant property appraisal for each Income Fund and
CNL Income Funds XVII and XVIII, (2) assist an investment banker retained by
us, as the financial advisor to you and the provider of the fairness opinions,
in reviewing the appraisals as they relate to the value of the number of APF
Shares paid to each of the Income Funds and CNL Income Funds XVII and XVIII and
(3) work with all parties involved in the Acquisition to fully explain its
valuation methodologies and conclusions. In accordance with the engagement
letter with Valuation Associates,
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each Income Fund and CNL Income Funds XVII and XVIII agreed to pay Valuation
Associates between approximately $2,600 and $9,600, depending on the number of
restaurant properties in the Income Fund and CNL Income Funds XVII and XVIII.
In September 1998, we selected Legg Mason to provide us with financial
advice and to render fairness opinions with respect to the acquisition of each
Income Fund and CNL Income Funds XVII and XVIII. Legg Mason has received $5,000
from each Income Fund and CNL Income Funds XVII and XVIII and will receive up
to $25,000 from each Income Fund upon rendering its fairness opinion to each
Income Fund and CNL Income Funds XVII and XVIII and reimbursement of out-of-
pocket expenses not to exceed $4,000 per Income Fund or $50,000 in the
aggregate.
On November 21, 1998, Valuation Associates presented its appraisal reports
to us with respect to each of the Income Funds and CNL Income Funds XVII and
XVIII.
On December 1, 1998, we received from APF's management a proposal to acquire
for an aggregate of 30,000,000 APF Shares all of the Income Funds and CNL
Income Funds XVII and XVIII.
On January 27, 1999, we compiled and submitted a counter-offer to the
management of APF proposing an increase in the consideration payable to the
Income Funds and CNL Income Funds XVII and XVIII from an aggregate of
30,000,000 to 30,500,000 APF Shares, which APF valued as aggregate
consideration of $610,000,000, based on the exchange value. We based our
$610,000,000 counter-offer on our belief that the quality of the Income Funds'
restaurant properties and the restaurant properties of CNL Income Funds XVII
and XVIII plus cash flow generated from such restaurant properties warranted a
higher price.
On January 27, 1999, we received from representatives of APF an acceptance
of our counter-offer proposing an increase in the consideration payable to the
Income Funds and CNL Income Funds XVII and XVIII from $600,000,000 to
$610,000,000, or from 30,000,000 APF Shares to 30,500,000 APF Shares based on
the exchange value, subject to Merrill Lynch's ability to render a fairness
opinion at the February 10, 1999 meeting of the Board of Directors that
supported the Special Committee's determination.
On March 10, 1999, Legg Mason rendered its opinions with respect to the
fairness from a financial point of view of (a) the APF Shares offered with
respect to the individual Income Funds and CNL Income Funds XVII and XVIII, (b)
the aggregate APF Shares offered with respect to the Income Funds and CNL
Income Funds XVII and XVIII and (c) the method of allocating the APF Shares
among the Income Funds and CNL Income Funds XVII and XVIII.
On March 12, 1999, APF accepted our counter-offer, and, subject to your
approval, entered into definitive acquisition agreements for each Income Fund
and CNL Income Funds XVII and XVIII.
On May 13, 1999, we retained Lowndes, Drosdick, Doster, Kantor & Reed, P.A.
as legal counsel to represent our interests in the lawsuit described above in
"Chronology of the Acquisition."
On June 3, 1999, we received notice from APF's management that APF intended
to withdraw its offer to acquire CNL Income Funds XVII and XVIII. We received
an offer to acquire the Income Funds for an aggregate of 27,343,243 APF Shares.
On June 4, 1999, we accepted APF's offer and entered into termination
agreements for CNL Income Funds XVII and XVIII.
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Our Reasons for Proposing the Acquisition
We are proposing that the Income Funds vote in favor of the Acquisition at
this time for the following reasons:
. we believe that because the APF Shares will be listed on the NYSE and
will be freely tradeable, you and the other Limited Partners will receive
the benefit of a public market valuation of real estate assets, which we
believe is greater than the value you and the other Limited Partners
would receive in a private market valuation with negotiated sales between
private investors;
. we believe that APF's acquisition of the CNL Restaurant Businesses,
including the Advisor, will be viewed positively and may result in a
greater valuation of APF because investment analysts specializing in real
estate securities in recent years have emphasized their strong preference
for internally-advised REITs;
. the APF Share consideration offered by APF to acquire the Income Funds is
a firm offer which we believe is reasonable. In addition, we believe the
APF Shares paid in the Acquisition may appreciate in value over time. As
such, we believe that the Acquisition represents the best way to maximize
your original investment in the Income Funds. In the event that we were
to auction the Income Funds in an effort to receive a higher purchase
price, there is a risk that there will be no interest in acquiring the
Income Funds or that there will be an interest in only acquiring a
portion of the Income Funds. If this were to happen, there is no
guarantee that APF will subsequently attempt to acquire the Income Funds
or if it does, that the purchase prices it offers for the Income Funds
will be as great;
. we believe that there is greater potential for increased distributions to
you as an APF stockholder and for appreciation in the price of your APF
Shares than there would be for you as a Limited Partner of your Income
Fund holding units. This growth potential results from future
acquisitions of additional restaurant properties, making mortgage loans
and engaging in other financing activities. In addition, as a result of
APF's acquisition of the Advisor, we believe that the value of APF Shares
will be enhanced because, as discussed above, we believe the investing
public prefers internally-advised REITs. We believe that substantial
opportunities currently exist to acquire additional restaurant properties
at attractive prices and to make mortgage loans on favorable terms. Your
Income Fund cannot take advantage of such opportunities because its
partnership agreement generally restricts it from borrowing, making
additional acquisitions, developing restaurant properties and making
mortgage loans;
. the combination of the restaurant properties owned by the Income Funds
with APF's existing restaurant properties, as well as future property
acquisitions made by APF, will diversify your investment over a larger
number of restaurant properties, a broader group of restaurant types and
tenants and geographic locations. As of March 31, 1999, 88% of APF's
tenants were the franchisor of the restaurant chain or one of the top
five franchisees of a particular restaurant chain based on sales. Your
investment also will become more diversified because a portion of your
investment in APF would be represented by the mortgage loans that APF
makes and by its other financing activities. Your investment will also
change from being an interest in a static, finite-life entity to an
investment in a growing operating company. This diversification will
reduce the dependence of your investment upon the performance of, and the
exposure to the risks associated with, the particular group of restaurant
properties currently owned by your Income Fund; and
. the combination of the Income Funds into the business already owned by
APF will result in administrative and operational economies of scale and
cost savings for APF. Particularly because the Income Funds are all
public entities subject to the SEC's reporting requirements, the
combination of the Income Funds into a single public company in APF would
save compliance costs.
Therefore, we believe that the Acquisition by APF of all the Income Funds,
rather than a liquidation, will result in the greatest possible value of the
investment for you and the other Limited Partners.
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Comparative Valuation Analysis
In assessing the fairness of the Acquisition, we relied on the appraisals
prepared by Valuation Associates in connection with its engagement by us. Based
on such information and other historical data of the Funds, we prepared a
comparative valuation analysis, which supported our determination that the
Acquisition is in the best interest of the Limited Partners of each of the
Income Funds.
The following table summarizes the results of our comparative valuation
analysis:
<TABLE>
<CAPTION>
Weighted
Original Original Average Trading
Limited Limited Partner Values of APF Estimated Prices of
Partner Investments less Shares Paid Estimated Liquidation Units
Investments any Distribution per Going Concern Value per per Average
less any of Net Sales average $10,000 Value per Average $10,000
Distribution Proceeds per Limited Partner Average 10,000 $10,000 Original
of Net Sales $10,000 Original Original Original Original Limited Partner
Income Fund Proceeds(1) Investment(1) Investment(2) Investment(3) Investment(4) Investment(5)
- ----------- ------------ ---------------- --------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
I....................... $12,001,150 $ 8,001 $ 7,613 $ 7,589 $ 7,030 $7,085
II...................... 23,046,408 9,219 9,455 9,419 8,724 8,914
III..................... 22,253,502 8,901 8,225 8,214 7,648 8,698
IV...................... 28,226,458 9,409 8,779 8,753 8,102 9,151
V....................... 22,258,682 8,403 8,100 8,085 7,524 8,704
VI...................... 35,000,000 10,000 10,429 10,385 9,726 9,257
VII..................... 30,000,000 10,000 10,439 10,410 9,753 9,400
VIII.................... 35,000,000 10,000 11,261 11,227 10,472 9,300
IX...................... 35,000,000 10,000 10,351 10,310 9,650 9,330
X....................... 40,000,000 10,000 10,390 10,349 9,645 9,320
XI...................... 40,000,000 10,000 10,761 10,729 10,000 8,900
XII..................... 45,000,000 10,000 10,402 10,356 9,501 9,220
XIII.................... 40,000,000 10,000 9,605 9,571 8,672 9,030
XIV..................... 45,000,000 10,000 9,479 9,430 8,514 9,140
XV...................... 40,000,000 10,000 9,229 9,182 8,291 8,580
XVI..................... 45,000,000 10,000 9,497 9,449 8,617 8,950
</TABLE>
- --------
(1) The original Limited Partner investments in CNL Income Fund, Ltd., CNL
Income Fund II, Ltd., CNL Income Fund III, Ltd., CNL Income Fund IV, Ltd.
and CNL Income Fund V, Ltd. were $15,000,000, $25,000,000, $25,000,000,
$30,000,000 and $25,000,000, respectively. These columns reflect, as of
December 31, 1998, an adjustment to the Limited Partners' original
investments based on distributions of net sales proceeds received from
sales of properties (both as a special distribution and those that were
added to working capital and subsequently distributed) for CNL Income Fund,
Ltd. through CNL Income Fund V, Ltd.
(2) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be significantly below the exchange value.
(3) Represents the value of the Income Fund, if the Income Fund continues
unchanged. See "Reports, Opinions and Appraisals."
(4) Represents the amount that we estimate would have been distributed to you
with respect to each of your units if the Income Funds had sold their
assets on December 31, 1998, subject to certain assumptions. See "Reports,
Opinions and Appraisals."
(5) Based on the weighted average trading prices of each Fund's units in the
secondary markets from April 1, 1998 to March 31, 1999. A substantial
majority of the transfer prices in this column reflect purchases by the
Income Funds of units as part of their repurchasing programs, and do not
necessarily reflect the prices for the units in a secondary market.
We believe that the comparative valuation analysis, when considered together
with the anticipated effect of the Acquisition and with all the other
differences between continued ownership of units as compared with the receipt
of APF Shares, supports our recommendation in favor of the Acquisition.
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OUR RECOMMENDATION AND FAIRNESS DETERMINATION
General
We believe the Acquisition to be fair to, and in the best interests of each
of, the Income Funds and their Limited Partners. After careful evaluation, we
have concluded that the Acquisition is the best way to maximize the value of
your investment. We recommend that you and the other Limited Partners approve
the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the
Acquisition with those of several alternatives, the Acquisition is
more economically attractive to you and the other Limited Partners
than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and the Income Funds and the terms of critical agreements, such as the Income
Funds' partnership agreements.
We also believe that the Acquisition is procedurally fair for several
reasons. First, with respect to each participating Income Fund, the Acquisition
is required to be approved by Limited Partners holding greater than 50% of the
outstanding units of such Income Fund and is subject to certain closing
conditions. Second, all Limited Partners of Income Funds that approve the
Acquisition and who vote against the Acquisition will be given the option of
receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others:
. that we will receive APF Shares, assuming APF acquires all of the
Income Funds, upon completion of the Acquisition, and
. that we will be relieved from certain ongoing liabilities with
respect to Income Funds that are acquired by APF.
For a detailed discussion of the conflicts of interest and potential
benefits of the Acquisition to the General Partners, see "Conflicts of
Interest--Substantial Benefits to Related Parties." To see the actual benefits
that we will receive if your Income Fund is acquired, please review your
supplement.
Material Factors Underlying Belief as to Fairness
The following is a discussion of all material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners and maximizes the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Funds. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes constitute fair value. In addition, we compared the
estimated values of the consideration which would have been received by you and
the other Limited Partners in alternative transactions and concluded that the
Acquisition is fair based on such comparison. We believe the Acquisition is the
best way to maximize the return on your investment because of your ability to
participate in the potential appreciation of APF Shares.
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Since the investment in your Income Fund is an investment in a static portfolio
due to the restrictions contained in your Income Fund's partnership agreement
and limited capital resources, your investments have less of an opportunity to
appreciate. Because APF is a growth-oriented operating company, you will have
the opportunity, as an APF stockholder, to participate in APF's future growth.
2. Similarity of Income Funds. We do not believe that there are any material
differences among the Income Funds that would affect the fairness of the
Acquisition to you or the other Limited Partners in any particular Income Fund.
Substantially all of the assets of the Income Funds are restaurant properties
leased on a triple-net basis which are similar in most respects, and the Income
Funds have substantially the same capital structures. In addition, the
investment objectives of each of the Income Funds are substantially the same.
The primary differences among the Income Funds are:
. Date of Formation. The Income Funds were formed at different times and,
therefore, would have begun liquidation at different times. As a result,
the Income Funds formed earlier have already sold some restaurant
properties.
. Income Fund Structure. Although the Funds' partnership agreements have
slightly different provisions with respect to allocations, distributions
and fees, we believe the differences in such provisions are not
substantial.
. Size and Diversity. Some of the Income Funds have purchased fewer
properties and are less diverse with respect to the number of tenants and
the geographic location and types of restaurant properties.
3. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners and our
statements above regarding the material terms underlying our belief as to
fairness are partially based upon the appraisals of each Income Fund's
restaurant properties prepared by Valuation Associates and upon the fairness
opinions provided by Legg Mason. We attributed significant weight to the
appraisals of Valuation Associates and the fairness opinions of Legg Mason,
which we believe support our conclusion that the Acquisition is fair to the
Limited Partners. We do not know of any factors that would materially alter the
conclusions made in the appraisals of Valuation Associates or the fairness
opinions of Legg Mason, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. We
believe that the engagement of Valuation Associates to provide the appraisals
of each Income Fund's restaurant properties and of Legg Mason to provide the
fairness opinions assisted us in the fulfillment of our fiduciary duties to the
Income Funds and the Limited Partners, notwithstanding that: (1) each of
Valuation Associates and Legg Mason received fees for its services, (2) Legg
Mason has previously provided investment banking services to the Income Funds
and to Commercial Net Lease Realty, Inc., an affiliate of CNL Group, Inc., and
(3) Valuation Associates has previously performed valuation appraisals for APF.
See "Reports, Opinions and Appraisals--Fairness Opinions." We note that because
the acquisition of any one Income Fund is not a condition of the acquisition of
any other Income Fund, the fairness opinions analyze each Income Fund
separately, not in combination with other Income Funds. See "Reports, Opinions
and Appraisals."
In rendering its opinions with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to the
individual Income Funds, (b) the aggregate APF Shares offered with respect to
the Income Funds and (c) the method of allocating the APF Shares among the
Income Funds, Legg Mason did not address or render any opinion with respect to
other aspects of the Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition or
the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
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. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Also, Legg Mason's opinions do not compare the relative merits of the
Acquisition with those of any other transaction or business strategy which were
or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinions do not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
4. Valuation of Alternatives. Based on the appraisals of each Income Fund's
restaurant properties prepared by Valuation Associates, we estimated the value
of the Income Funds if liquidated and as going concerns. On the basis of these
calculations, we believe that the ultimate value of the APF Shares will exceed
the going concern value and liquidation value of each Income Fund.
5. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners whose Income Funds are acquired will be able to benefit from the
potential growth of APF as an operating company and will also receive
investment liquidity through the public market in APF Shares.
6. Net Book Value of the Income Funds. We calculated the book value of the
Income Funds under generally accepted accounting principles, or GAAP, as of
March 31, 1999 per average $10,000 original investment. Since the calculation
of the book value was done on a GAAP basis, it is primarily based on historical
cost and, therefore, is not indicative of the true fair market value of the
Income Funds. This figure was compared to three other figures.
1. the value of the Income Fund if it commenced an orderly liquidation
of its investment portfolio on December 31, 1998,
2. the value of the Income Fund if it continued to operate in accordance
with its existing partnership agreement and business plans, and
3. the estimated value of the APF Shares, based on the exchange value,
paid to each Income Fund per average $10,000 invested.
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Summary of Valuations
(per average $10,000 original investment)
<TABLE>
<CAPTION>
Original
Limited Partner Estimated
Investments Less Going Value
any Distributions GAAP Book Liquidation Concern of APF
of Sales Proceeds(1) Value Value(2) Value(2) Shares
-------------------- --------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
CNL Income Fund, Ltd. .. $8,001 $5,471 $ 7,030 $7,589 $7,613
CNL Income Fund II,
Ltd. .................. 9,219 7,076 8,724 9,419 9,455
CNL Income Fund III,
Ltd. .................. 8,901 6,281 7,648 8,214 8,225
CNL Income Fund IV,
Ltd. .................. 9,409 6,718 8,102 8,753 8,779
CNL Income Fund V,
Ltd. .................. 8,903 6,572 7,524 8,085 8,100
CNL Income Fund VI,
Ltd. .................. 10,000 8,133 9,726 10,385 10,429
CNL Income Fund VII,
Ltd. .................. 10,000 8,060 9,753 10,410 10,439
CNL Income Fund VIII,
Ltd. .................. 10,000 8,726 10,472 11,227 11,261
CNL Income Fund IX,
Ltd. .................. 10,000 8,303 9,650 10,310 10,351
CNL Income Fund X,
Ltd. .................. 10,000 8,288 9,645 10,349 10,390
CNL Income Fund XI,
Ltd. .................. 10,000 8,578 10,000 10,729 10,761
CNL Income Fund XII,
Ltd. .................. 10,000 8,733 9,501 10,356 10,402
CNL Income Fund XIII,
Ltd. .................. 10,000 8,392 8,672 9,571 9,605
CNL Income Fund XIV,
Ltd. .................. 10,000 8,724 8,514 9,430 9,479
CNL Income Fund XV,
Ltd. .................. 10,000 8,837 8,291 9,182 9,229
CNL Income Fund XVI,
Ltd. .................. 10,000 8,666 8,617 9,449 9,497
</TABLE>
- --------
(1) This column reflects, as of December 31, 1998, an adjustment to the Limited
Partners' original average $10,000 investment based on distributions of net
sales proceeds received from sales of restaurant properties (both as a
special distribution and those that were added to working capital and
subsequently distributed) for CNL Income Fund, Ltd. through CNL Income Fund
V, Ltd.
(2) Liquidation and going concern values were based on appraisals prepared by
Valuation Associates. For a complete description of the methodologies
employed by Valuation Associates, see "Reports, Opinions and Appraisals."
We do not know of any factors that may materially affect (1) the value of
the consideration to be received by the Income Funds that are acquired in the
Acquisition, (2) the value of the units for purposes of comparing the expected
benefits of the Acquisition to the potential alternatives considered by us or
(3) the analysis of the fairness of the Acquisition.
Relative Weight Assigned to Material Factors
We gave greatest weight to the factors set forth in paragraphs numbered one
through five above in reaching our conclusions as to the fairness of the
Acquisition. Of paragraphs one through five, we considered paragraphs one,
three and four to be the most significant.
Fairness to Limited Partners Receiving APF Shares in the Acquisition
The APF Shares represent equity securities in APF permitting the holders of
the APF Shares to participate in APF's potential growth. Thus, you, as a holder
of APF Shares, will share in both the benefits and risks of an investment of
APF. In addition, the APF Shares will be listed on the NYSE which will make an
investment in the APF Shares a more liquid investment than an investment in the
units. See "Comparison of Units, Notes and APF Shares." On balance, we have
concluded that the Acquisition is fair to the Limited Partners of each Income
Fund that receives APF Shares because such investment has substantially more
growth potential than an investment in the units and the APF Shares will be a
more liquid investment than an investment in the units.
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<PAGE>
Fairness in View of Conflicts of Interest
We have fiduciary duties to you and the other Limited Partners. We are
expected, in handling the affairs of the Income Funds, to exercise good faith,
to use care and prudence and to act with a duty of loyalty to the Limited
Partners. Under these fiduciary duties, we are obligated to ensure that the
Income Funds are treated fairly and equitably in transactions with third
parties, especially where consummation of such transactions may result in our
interests being opposed to, or not totally aligned with, the interests of you
and the other Limited Partners. To assist us in fulfilling our fiduciary
obligations, we obtained fairness opinions from Legg Mason and the independent
appraisals of Valuation Associates.
In addition, as members of APF's Board of Directors, Messrs. Seneff and
Bourne, the individual general partners of your Income Fund, have fiduciary
duties to APF's stockholders. These duties consist of the duty of care to act
in the best interests of APF and the duty of loyalty to keep APF's Board of
Directors fully-informed of all material facts regarding a transaction with APF
in which they have a personal interest. To assist Messrs. Seneff and Bourne in
fulfilling their duty of care, APF retained Merrill Lynch and Salomon Smith
Barney to advise it in the Acquisition and obtained fairness opinions from
Merrill Lynch. To assist Messrs. Seneff and Bourne in fulfilling their duty of
loyalty, APF formed a Special Committee of its independent directors who have
no financial interest in the Acquisition to evaluate the terms of the
Acquisition.
In considering the Acquisition, we gave full consideration to these
fiduciary duties. However, the Acquisition affords us a number of benefits. We
may be viewed as having a potential conflict of interest with you and the other
Limited Partners with respect to matters such as APF's acquisition of the
Advisor. Furthermore, we will not have any personal liability for APF
obligations and liabilities which occur after the Acquisition. See "Conflicts
of Interest--Substantial Benefits to Related Parties" and "Reports, Opinions
and Appraisals."
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REPORTS, OPINIONS AND APPRAISALS
All APF Share information set forth in this section is presented assuming
the one-for-two reverse stock split approved by APF stockholders on May 27,
1999 had not been effected. Accordingly, the analysis performed assumed that an
aggregate of 54,686,486 APF Shares would be issued in the Acquisition and
12,300,000 APF Shares would be issued in the acquisition of the CNL Restaurant
Businesses. Therefore, because the one-for-two reverse stock split reduced the
aggregate number of APF Shares by one-half without affecting the aggregate
value of the APF Share consideration, you should multiply the APF Share
information set forth in this section by two in order to obtain a meaningful
comparison with your APF Share information.
General
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund. The
fairness opinions rendered to each Income Fund by Legg Mason are attached as
Appendix A to each Income Fund's supplement. We did not impose any limitations,
other than as described in this consent solicitation, in the scope of the
investigations conducted by Legg Mason or Valuation Associates to enable each
of them to render their respective appraisals, reports and opinions. We will
provide, free of charge, a copy of the appraisals and valuation report
completed by Valuation Associates with respect to your Income Fund, upon your
written request or that of your representative, who has been designated in
writing, that is submitted to your Income Fund, Attention: Investor Services.
We did not make any contacts, other than as described in this consent
solicitation, with any outside party regarding the preparation by the outside
party of an opinion as to the fairness of the Acquisition, an appraisal of the
Income Funds or their assets, a valuation of APF or any other report with
respect to the Acquisition.
Fairness Opinions to General Partners
On March 10, 1999, Legg Mason rendered written opinions to us to the effect
that, as of such date and based upon the qualifications and assumptions made
and matters considered by Legg Mason:
. the APF Share consideration offered by APF with respect to each of the
individual Income Funds, CNL Income Funds XVII and XVIII and their
Limited Partners is fair from a financial point of view;
. the aggregate APF Share consideration offered with respect to all of the
Income Funds and CNL Income Funds XVII and XVIII is fair from a financial
point of view; and
. the method of allocating the APF Share consideration among the Income
Funds and CNL Income Funds XVII and XVIII in the Acquisition pursuant to
the merger agreements is fair from a financial point of view.
The full text of the Legg Mason opinion to your Income Fund, which sets
forth the assumptions made, procedures followed, and matters considered in and
the limitations on the review undertaken in connection with the Legg Mason
opinion, is attached as Appendix A to your Income Fund's supplement that
accompanies this consent solicitation and is incorporated in this document by
reference. The summary of the opinion set forth below is qualified in its
entirety by reference to the full text of the opinion. Legg Mason's opinions
were provided for our information and assistance in connection with our
consideration of the transactions contemplated by the merger agreements and the
opinions do not constitute a recommendation as to how Limited Partners should
vote with respect to the transaction.
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<PAGE>
In connection with its opinions, Legg Mason reviewed, among other things:
. the merger agreements with respect to the transactions;
. the financial statements and the related filings of the Income Funds and
CNL Income Funds XVII and XVIII on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
. the financial statements and the related filings of APF on Form 10-K for
the year ended December 31, 1997 and Form 10-Q for the nine months ended
September 30, 1998;
. internal information concerning the business and operations of the Income
Funds and CNL Income Funds XVII and XVIII furnished by the general
partners, including a draft of the Income Funds' Form 10-K and that of
CNL Income Funds XVII and XVIII for the year ended December 31, 1998,
cash flow projections and operating budgets;
. internal information concerning the business and operations of APF
furnished by management of APF, including a draft of APF's Form 10-K for
the year ended December 31, 1998, cash flow projections and operating
budgets;
. financial data and operating statistics provided by us and the management
of APF and similar information for selected public companies; and
. the appraisals of the properties of the Income Funds and CNL Income Funds
XVII and XVIII prepared by Valuation Associates, dated January 6, 1999.
Legg Mason also held meetings and discussions with us and APF's directors,
officers and employees concerning the operations, financial condition and
future prospects of the Income Funds and CNL Income Funds XVII and XVIII and
APF, respectively. In addition, Legg Mason conducted other financial studies,
analyses and investigations and considered other information as it deemed
appropriate.
Legg Mason relied upon the accuracy and completeness of all information that
was publicly available, supplied or otherwise communicated to Legg Mason by or
on behalf of the Income Funds, CNL Income Funds XVII and XVIII or APF. Legg
Mason further relied upon our assurances that we are unaware of any factors
that would materially alter the conclusion made in Legg Mason's fairness
opinions, including developments or trends that have materially affected or are
reasonably likely to materially affect such conclusions. Legg Mason assumed
that the financial forecasts, assumptions and bases thereof examined by it were
reasonably prepared and reflected our best currently available estimates and
good faith judgments as to the future performance of the Income Funds, CNL
Income Funds XVII and XVIII and APF. Legg Mason has relied on these forecasts
and does not in any respect assume any responsibility for the accuracy of
completeness of these forecasts. Legg Mason also assumed, with consent, that
any material liabilities, contingent or otherwise, known or unknown of the
Income Funds, CNL Income Funds XVII and XVIII or APF are as set forth in the
respective financial statements of the Income Funds, CNL Income Funds XVII and
XVIII and APF. Legg Mason also assumed, with our consent, that the table
prepared by or for us of the allocation of the APF Share consideration among us
and the Limited Partners of each of the Income Funds has been prepared in
accordance with, and complies with the terms and conditions of the partnership
agreements of the Income Funds. Legg Mason also assumed that the appraisal was
reasonably prepared by and reflected the good faith judgements of Valuation
Associates, and Legg Mason does not in any respect assume any responsibility
for its accuracy or completeness. In addition, Legg Mason did not make an
independent evaluation or appraisal of the assets or liabilities contingent or
otherwise of the Income Funds or APF. Legg Mason's opinions necessarily were
based upon financial, economic, market and other conditions and circumstances
existing and disclosed to Legg Mason as of the date of its opinion. Legg Mason
has not been requested to update its fairness opinion prior to the closing of
the Acquisition. Legg Mason's opinion does not imply any conclusion as to the
fairness of the Acquisition on any date subsequent to the date of its opinion.
To date there has not been, and we do not anticipate that there will be, any
significant event that would or could affect the fairness determination if it
were redetermined based upon information as of a more recent date.
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<PAGE>
Legg Mason has acted as financial advisor to us and will receive a fee for
their services. It is understood that Legg Mason's fairness opinions are for
our information in our evaluation of the Acquisition and Legg Mason's opinions
do not constitute a recommendation to us or to you as to how to vote on the
Acquisition or as to whether you should elect to receive the APF Share
consideration or the notes of APF. Legg Mason was not requested to, and did
not, solicit the interest of any other party in acquiring interests in the
Income Funds or their assets. Additionally, Legg Mason's opinions do not
compare the relative merits of the Acquisition with and CNL Income Funds XVII
and XVIII those of any other transaction or business strategy which were or
might have been considered by us as alternatives to the Acquisition.
In rendering its opinions with respect to the fairness, from a financial
point of view, of (1) the APF Shares offered to the individual Income Funds,
(2) the aggregate APF Shares offered with respect to the Income Funds and (3)
the method of allocating the APF Shares among the Income Funds, Legg Mason did
not address or render any opinion with respect to other aspects of the
Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition or
the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or other assets
if liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs allocated
to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
The following summarizes the material financial analyses set forth in the
material report provided to us on March 10, 1999 in connection with Legg Mason
rendering its opinions.
In valuing APF and the Income Funds, Legg Mason performed the following
financial analysis:
. an analysis of comparable publicly traded real estate investments trusts;
. a dividend discount analysis; and
. a discounted cash flow analysis.
Valuation of APF
Comparable Trading Multiples Analysis
Legg Mason compared financial and operating information and ratios for APF
with the corresponding financial and operating information for a group of
publicly traded real estate investment trusts engaged primarily in the
ownership, operation and financing of restaurant properties. Legg Mason deemed
the following companies as reasonably comparable to APF:
. Franchise Finance Corporation of America; and,
. U.S. Restaurants Properties, Inc.
Legg Mason compared the stock price for each of these comparable companies
with their 1999 and 2000 projected funds from operations. This analysis
indicated the following multiples for these compared companies:
<TABLE>
<CAPTION>
Selected Valuation Multiples
-----------------------------
Public Comparables
-----------------------------
High Mean Low
--------- --------- ---------
<S> <C> <C> <C>
Price to 1999 Projected Funds from Operations.... 9.0 x 8.5 x 8.0 x
Price to 2000 Projected Funds from Operations.... 8.0 x 7.5 x 7.0 x
</TABLE>
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<PAGE>
Legg Mason applied these multiples to the projected funds from operations of
APF for the years 1999 and 2000 to establish a valuation range based on trading
multiples. This analysis resulted in a per share valuation range between $7.04
and $8.24.
Dividend Discount Analysis
Legg Mason estimated a valuation range for APF Shares using a discounted
dividend analysis. The discounted dividend analysis assumes, as a basic
premise, that the value of an equity security reflects the present value of the
future dividends. To establish a current implied value under this approach,
future dividends must be estimated and an appropriate discount rate and
terminal multiple must be determined. The management of APF provided Legg Mason
with projections of its dividends for the six months ending December 31, 1999
and the years 2000 through 2003. The variables applied to the dividend discount
analysis, using discount rates reflecting the 30-year Treasury rate plus a risk
premium, are summarized as follows:
Dividend Discount Analysis
---------------------------------
<TABLE>
<CAPTION>
Discount Rate Terminal Multiple
<S> <C>
13.6% 11.6x
14.6% 10.4x
15.6% 9.4x
</TABLE>
Based upon APF's projection of dividends per APF Share for the six months
ending December 31, 1999 and the years 2000 through 2003, inclusive, and the
foregoing terminal value multiples, the range of implied values per APF Share
was $8.80 to $10.79.
Discounted Cash Flow Analysis
Legg Mason also estimated a valuation range for APF Shares using a
discounted cash flow analysis. The discounted cash flow analysis assumes, as a
basic premise, that the intrinsic value of any business or property is the
current value of the future cash flow that the business or property will
generate for its owners. To establish a current implied value under this
approach, future cash flow must be estimated and an appropriate discount rate
and terminal multiple must be determined. The management of APF provided Legg
Mason with projections of cash flow to equity stockholders for the six months
ending December 31, 1999 and the years 2000 through 2003. The variables applied
to the discounted cash flow analysis, using discount rates reflecting the
estimated equity cost of capital are summarized as follows:
Discounted Cash Flow Analysis
---------------------------------
<TABLE>
<CAPTION>
Discount Rate Terminal Multiple
<S> <C>
12.0% 10.0x
14.0% 9.0x
16.0% 8.0x
</TABLE>
Based upon APF's projection of available cash flow to equity stockholders
for the six months ending December 31, 1999 and the years 2000 through 2003,
inclusive, and the foregoing terminal value multiples and discount rates, the
range of implied values per APF Share was $9.00 to $11.94.
Valuation of the Income Funds
Comparable Trading Multiples Analysis
Legg Mason compared financial and operating information and ratios for the
Income Funds with the corresponding information for a group of publicly traded
real estate investment trusts engaged primarily in the
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ownership, operation, management and financing of commercial properties. Legg
Mason deemed the following companies as reasonably comparable to the Income
Funds:
. Commercial Net Lease Realty, Inc.;
. Franchise Finance Corporation of America;
. Realty Income Corporation; and,
. U.S. Restaurant Properties, Inc.
Among other analyses, Legg Mason compared the stock price for each of these
comparable companies with their 1999 and 2000 projected funds from operations.
This analysis indicated the following multiples for these comparable companies:
<TABLE>
<CAPTION>
Selected Trading
Valuation Multiples
-------------------
Public Comparables
-------------------
High Mean Low
------ ------ -----
<S> <C> <C> <C>
Price to 1999 Projected Funds from Operations.............. 8.0 x 7.5 x 7.0 x
Price to 2000 Projected Funds from Operations.............. 7.5 x 7.0 x 6.5 x
Trailing Twelve Months Earnings Before
Interests, Taxes, Depreciation and Amortization (EBITDA).. 10.5 x 10.0 x 9.5 x
</TABLE>
Legg Mason applied these multiples to the projected funds from operations
and EBITDA for the Income Funds for the years 1999 and 2000 and to the trailing
twelve months EBITDA to establish a valuation range based on trading multiples.
This analysis resulted in an implied per share valuation range between $6.44
and $9.73.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative methods of financial analyses
and the application of those methods to the particular circumstances and,
therefore, these opinions are not readily susceptible to partial analysis or
amenable to summary description. Accordingly, Legg Mason believes that its
analysis must be considered as a whole and that considering any portion of the
analysis and of the factors considered, without considering all analyses and
factors, could create a misleading or incomplete picture of the process
underlying the Legg Mason opinions. No entity used in the above analyses as a
comparison is identical to APF, the Income Funds or the combined company. Any
estimates contained in these analyses are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than as set forth therein. In addition, analyses
relating to the values of businesses are not appraisals and may not reflect the
prices at which businesses may actually be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty and Legg Mason does
not assume responsibility for any future variations from such analyses or
estimates. The above paragraphs summarize the significant quantitative and
qualitative analyses performed by Legg Mason in arriving at its opinions. As
described above, Legg Mason's opinions to us were one of many factors we took
into consideration in making our determination to approve the merger
agreements.
We selected Legg Mason as our financial advisor on the basis of Legg Mason's
experience in the valuation of businesses and their securities in connection
with mergers and acquisitions, negotiated underwritings, secondary
distributions of securities, private placements and valuations for corporate
purposes, especially with respect to real estate investment trusts, franchised
real estate and transactions similar to the Acquisition. Prior to its current
engagement by us, Legg Mason has provided investment banking services to
certain of the Income Funds from time to time, including having participated in
the offering of units by certain Income Funds for which Legg Mason received
customary commissions. Legg Mason has not participated in the offering of any
Income Fund's units during the past two years. In addition, Legg Mason has
provided investment banking services to Commercial Net Lease Realty, Inc., an
affiliate of CNL Group, Inc., including having participated in a number of
public offerings of its securities for which it received commissions of
approximately $675,000. Legg Mason also received $175,000 for providing a
fairness opinion to the special
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committee of the board of directors of Commercial Net Lease Realty, Inc. in
connection with its acquisition of its external advisor, also a former
affiliate of ours. Legg Mason may provide investment banking services to APF in
the future and trade APF Shares for its own account and for the accounts of its
customers, and accordingly, may at any time hold a long or short position in
APF Shares.
Pursuant to an engagement letter dated as of November 16, 1998, Legg Mason
will receive a fee, regardless of whether any Income Fund is acquired, of
$30,000 from each Income Fund for its services in rendering its fairness
opinions or $540,000 in the aggregate, including CNL Income Funds XVII and
XVIII. Legg Mason will also be reimbursed for its expenses, including the
reasonable fees and expenses of its attorneys, provided that all expenses may
not exceed $4,000 for each Income Fund and $50,000 in the aggregate. We have
agreed to indemnify Legg Mason, its affiliates and each of its directors,
officers, employees, agents, consultants, and attorneys, and each person or
firm, if any, controlling Legg Mason or any of the foregoing, against certain
liabilities, including liabilities under federal securities law.
Income Fund Appraisals
General. Valuation Associates has prepared and delivered to each Income Fund
an appraisal report dated January 6, 1999, based upon and subject to the
matters referenced in the appraisal, containing its opinion regarding the value
of each Income Fund as of December 31, 1998. Valuation Associates is a
nationally recognized independent and fully diversified real estate appraisal
firm with extensive valuation experience. We decided to retain Valuation
Associates to render the appraisal in connection with the Acquisition because
of its valuation experience with respect to franchised restaurant real estate
and transactions similar to the Acquisition. Valuation Associates' restricted
appraisal report was intended to comply with the reporting requirements set
forth under Standard Rule 2-2 of the Uniform Standards of Professional
Appraisal practice for a Restricted Appraisal Report.
The purpose of the appraisals is to establish the relative values of the
restaurant properties in each Income Fund's portfolio. We used the appraisals
to assist us in determining the reasonableness of the proposed consideration
payable by APF to each Income Fund in the Acquisition. Valuation Associates'
appraisals of the Income Funds' restaurant property portfolios address the
market value of each Income Fund's leased and ownership interest in each
restaurant property and the liquidation value of each Income Fund's restaurant
properties, based on certain specified assumptions.
Market Value/Going Concern--Valuation Methodology. Valuation Associates'
appraisals of the market value of the Income Funds' restaurant properties
primarily involved the income approach and the cost approach to estimating
market value. A third approach, the sales comparison approach is usually used
only in instances where the valuation of the underlying restaurant property was
required or for select closed restaurants with no contractual rent. On a
portfolio or Income Fund basis, this approach was not useful, since Valuation
Associates did not find any comparable sales of large portfolios during their
research. The use of the two primary approaches in the appraisals are
summarized below.
. The income approach to value was relied upon as the primary appraisal
technique based upon the restaurant properties' capability to generate
net income and to be bought and sold in the marketplace.
. The cost approach was applied in Valuation Associates' analysis and was
considered to be relevant only where a value for a reversionary interest
in the property was required and the use of direct capitalization would
not have been the method of choice.
Since the appraisals involved the estimation of the aggregate market value
of the leased and ownership interests of each Income Funds' restaurant property
portfolio, Valuation Associates determined that only the income approach
provided a true test of market value for the restaurant properties. The value
of the restaurant properties was developed by the capitalization of the lease
payments into present value using the discounted cash flow analysis, whereby
anticipated future income streams over a ten-year holding period were
discounted
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at a market-derived rate of 8.25% to 12.50%, depending on the restaurant
property, to a net present value estimate using a cash flow model and a
revisionary value, which is the value resulting from sale at the end of the
tenth year, was discounted at a market-derived terminal capitalization rate of
9.00% to 12.50%. Valuation Associates made the following assumptions in
determining its cash flow analysis with respect to its market value analysis of
each Income Fund:
1. a ten-year holding period for each property.
2. a 4% annual allowance related to normal day-to-day operations,
including functions relating to compliance with the SEC reporting
requirements, investor relations and communications and management issues
not specifically related to property level activities.
3. a 1% annual allowance for a management fee.
4. a flat amount of $200 per restaurant property, per year for
miscellaneous expenses such as bookkeeping, legal fees and other
proportionate charges. Anticipated rental income as well as adjustments for
vacancy with no rent being paid, percentage rent, management fees and
administrative expenses were analyzed over the holding period.
The selection of the discount rate to be applied to the estimated cash flow
over the ten year holding period for each property was based upon Valuation
Associates multi-tiered analysis of the risk involved with each restaurant
property. For each restaurant property, Valuation Associates first analyzed
both general and specific market risks, lessee/borrower risk and property risk.
Next, Valuation Associates evaluated the attitude and expectation of market
participants and compared this to a variety of alternative investment vehicles
such as stock, bonds or other real estate investments. Finally, Valuation
Associates looked at the various franchisors' company profile and financial
strength based on stock reports, investor publications, trade journals and
discussions with market participants.
At the end of the ten year holding period, Valuation Associates assumed that
the restaurant property portfolio of each Income Fund would be sold in an
orderly manner. For purposes of such sale, Valuation Associates assumed that
the Income Fund would incur a 2% sales expense, which included any fees for
brokerage or attorneys, applicable closing costs and miscellaneous charges upon
disposition of the restaurant properties.
Property Categorization. Valuation Associates initially segregated the
restaurant properties of each Income Fund into three geographic regions:
California, the western United States, comprised of Nevada, Arizona, Oregon and
Washington, and the remaining states within the continental United States,
based on its observation that certain areas of the United States tend to have
value and demand characteristics that differ from others. Within each
geographical region, the restaurant properties were further classified relative
to their operational characteristics as either corporate, multi-unit operators
or private/single unit operator types since, in the professional opinion of
Valuation Associates, these differing operational structures tend to exhibit
variable risk characteristics and cash flows.
These second two categories were further subcategorized by their operational
status into the following groups, using Valuation Associates' terminology:
1. Store operating normally with rent being paid;
2. Closed store--corporate franchisor paying rent;
3. Closed store--franchisee paying rent;
4. Closed store--corporation in bankruptcy/no rent;
5. Closed store--private operator paying partial rent;
6. Closed store--franchisee paying no rent;
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7. Closed store--private operator paying no rent;
8. Store under construction.
Property Valuation Assumptions. The special assumptions made by Valuation
Associates in its appraisals of each Income Fund's restaurant properties are
set forth in summary form as follows:
. Client Provided Information. We provided Valuation Associates with
summarized data pertaining to sales volumes, lease data and other
property specific data. Valuation Associates assumed, for purposes of its
appraisals that this information was true and complete as of the date
given and stated in its report that it has no reason to believe that the
data with which we provided them is inaccurate in any material respect.
. Physical Inspections. We did not request that Valuation Associates
conduct personal inspections of each of the restaurant properties.
Valuation Associates, consequently, has assumed that, unless otherwise
specified in the specific appraisal data, that each restaurant property
is in good physical condition and continues to exhibit good functional
utility and level of modernization in keeping with the current standards
of the individual restaurant chain.
. Litigation. Valuation Associates assumed that each of the restaurant
properties is free from any pending or proposed litigation, civil
engineering improvements or eminent domain proceedings, unless it
received specific information otherwise.
. Material Adverse Changes. The date of the appraisals is December 31,
1998. In the event that any given tenant within the portfolio files for
bankruptcy or suffers significant adverse financial or operational
changes subsequent to the date of the reports, Valuation Associates
reserves the right to revise the appraisal relating to such tenant and
such restaurant property.
. Properties Under Construction. With respect to restaurant properties
under construction, Valuation Associates assumed that the data regarding
construction cost, lease information and building specifications, among
other things, is true and correct.
. Highest and Best Use. For purposes of the appraisals, Valuation
Associates assumed that the existing building improvements represent the
highest and best use of the respective restaurant properties.
. Joint Ventures and Tenants in Common. For the restaurant properties in
each Income Fund that are under a joint venture agreement, Valuation
Associates allocated the respective proportionate value of the restaurant
property in question to each Income Fund in the joint venture agreement.
. Real Estate Only. The appraisals are for the value of the real estate
only, and does not include furniture, fixtures and equipment in the
restaurants which are not owned by the Income Funds but are typically
owned by the tenant.
. Lease Renewals. For purposes of the appraisals, Valuation Associates did
not analyze any lease renewals which would occur during the 10-year
holding period. Operators of restaurants currently performing at or above
the average restaurant sales volume of the respective restaurant chains
are assumed to have exercised the renewal options at the terms and
conditions of the last lease term or as specified in the lease renewal
option detail.
. Risk by Restaurant Operator. Valuation Associates relied solely upon
lease information supplied by us with regard to tenant-descriptive
information relating to its categorization of the type of restaurant
operators, whether corporate or private, single or multi-unit. Valuation
Associates relied upon information supplied by us, in conjunction with
publicly available and Valuation Associates' own proprietary market data,
with regard to descriptive and financial information relating to the
risks inherent with the type of restaurant operator, whether corporate or
private, single or multi-unit.
. Bankruptcies. As of the date of the reports submitted to us by Valuation
Associates, a number of restaurant properties occupied by two restaurant
chains, Long John Silver's and Boston Market, were
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protected by bankruptcy laws. Because of the uncertainty of the future
operations of these restaurant chains, Valuation Associates used market
level rents as well as capitalization rates in the analysis of the
restaurant properties vacated by these two restaurant chains.
There were no assets subject to any material qualifications by Valuation
Associates with respect to the valuation.
The date of the value of the restaurant properties of each Income Fund, as
set forth in the appraisal rendered by Valuation Associates, is December 31,
1998. As of the date of this consent solicitation, we are not aware of any
material event subsequent to the date of the appraisal that would result in any
material changes to any of the aggregate values set forth in the appraisals
rendered by Valuation Associates. The appraisals rendered by Valuation
Associates will be updated and a supplemental consent solicitation will be
provided to you and the other Limited Partners if we determine that any event
has occurred or condition has changed since the date of the appraisals that may
have caused a material change in the aggregate values reported.
During the past two years, Valuation Associates has rendered appraisals of
the value of the leased and ownership interest of the Income Funds with respect
to certain restaurant properties acquired by the Income Funds from third
parties and received compensation for such services of $123,750. In connection
with the Acquisition, we paid or will pay on behalf of the Income Funds,
Valuation Associates approximately $105,420 in the aggregate for its real
estate appraisal services regardless of whether one or more Income Funds are
not acquired in the Acquisition. In addition, during the past two years,
Valuation Associates has been retained by APF to provide appraisal services and
has received compensation for such services of $1,066,011. We anticipate that
APF may engage Valuation Associates for future valuations and appraisals of
properties of APF. There is no contract, agreement or understanding between APF
and Valuation Associates regarding any future engagement.
Liquidation Valuation. We also requested that Valuation Associates provide
us with a liquidation value for the restaurant properties of each of the Income
Funds. In providing us with such an estimate, Valuation Associates made several
assumptions regarding the conditions under which we would be selling the
restaurant properties of each Income Fund. These assumptions were then applied
to the market value derived for each restaurant property as described above.
These assumptions include:
. Time Period. We asked that Valuation Associates assume that the
liquidation of the Income Funds' restaurant property portfolios occur
over a 12-month period. According to Valuation Associates, this would
shorten the normal marketing period estimate by as much as 50%. Thus,
Valuation Associates assumed that for a 12-month period, a discount of 5%
from the appraised present value would be necessary.
. Marketing of Restaurant Properties. Each Income Fund would make an
aggressive marketing effort in the sale of the restaurant properties. In
connection with this assumption, Valuation Associates allowed for 1/2 of
one percent of the appraised present value of each restaurant property as
a reasonable amount for the increased marketing effort and contingency
costs.
. Brokered Sales. In light of the 12-month liquidation period assumption,
Valuation Associates assumed (and we agreed) that in such a liquidation,
we would enlist the assistance of brokers. Based upon that assumption and
upon current market research, Valuation Associates applied a 2% brokerage
commission to the appraised present values of the restaurant properties.
. Other Fees. Valuation Associates also assumed that we would have
attorney, consultant and appraisal fees, as well as transfer taxes,
surveys, title insurance and other related expenses that would amount to
approximately 2% of the appraised present value of the restaurant
properties in each of the Income Funds.
. Bankruptcies. In connection with the bankruptcy filings made by certain
tenants of Long John Silver's and Boston Market restaurant properties,
Valuation Associates reviewed the restaurant properties of
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these two restaurant chains and increased their discount rates and
capitalization rates to reflect the increased risk and the increased yield
that an investor would expect.
Fairness Opinions of Merrill Lynch to APF's Special Committee with respect to
the CNL Restaurant Businesses and the Income Funds
Opinion of the APF Special Committee's Financial Advisor
In connection with the APF Special Committee's consideration of the
acquisition of the CNL Restaurant Businesses and the Acquisition, Merrill Lynch
delivered two separate oral and written opinions on February 10, 1999 to the
APF Special Committee to the effect that, as of such date and based upon the
assumptions made, matters considered and limits of review set forth therein,
(1) the consideration to be issued by APF in connection with the CNL Restaurant
Businesses acquisitions, when viewed together as a single transaction, is fair,
from a financial point of view, to APF and (2) the consideration to be issued
by APF in connection with the Acquisition of the Income Funds, when viewed
together as a single transaction, is fair, from a financial point of view, to
APF. We refer to both opinions in this section as the fairness opinions.
The full text of each of Merrill Lynch's fairness opinions, which sets forth
the assumptions made, matters considered, procedures followed and
qualifications and limitations of the review undertaken by Merrill Lynch, is
attached to the Registration Statement, of which this consent solicitation is a
part, as exhibits. The descriptions of the fairness opinions set forth herein
are summaries of 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 APF Special Committee. The fairness opinions address
only the fairness, from a financial point of view, to APF of the consideration
to be issued by APF in connection with the acquisition of the CNL Restaurant
Businesses, when viewed together as a single transaction, and the Acquisition
of the 16 Income Funds, when viewed together as a single transaction. The
fairness opinions do not address the merits of the underlying decisions by APF
to engage in any of the acquisitions. The fairness opinions were not addressed
to, and should not be relied upon by, the Limited Partners. Merrill Lynch's
analysis and preparation of the fairness opinions were undertaken from the
perspective of APF. The fairness opinions do not address the fairness of any
consideration to be received by the Limited Partners in connection with the
Acquisition. The fairness opinions do not constitute, nor should they be
construed as, a recommendation to any Limited Partner as to how such Limited
Partners should vote on any matter presented to such Limited Partners,
including any matter presented in this consent solicitation. For a discussion
of Legg Mason's fairness opinions to each Income Fund, please refer to
"Reports, Opinions and Appraisals--Fairness Opinions."
Merrill Lynch is an internationally recognized investment banking firm and,
as part of its investment banking business, is continually engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, underwritings, distributions of securities and similar
activities. The APF Special Committee engaged Merrill Lynch because of these
qualifications and because of its experience in valuation and financial
analysis with respect to franchised real estate, real estate investment trusts
and transactions similar to the acquisitions of the CNL Restaurant Businesses
and the Acquisition.
In preparing the CNL Restaurant Businesses fairness opinion, Merrill Lynch,
among other things:
(1) Reviewed 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,
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(3) Conducted discussions with members of senior management and
representatives of the CNL Restaurant Businesses and APF concerning the
matters described in clauses (1) and (2) of this paragraph, as well as
their respective businesses and prospects before and after giving effect to
the acquisitions and the CNL Restaurant Businesses expected synergies,
(4) Reviewed valuation multiples of 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, furnished to it by the management team of APF and by us,
(3) Reviewed and analyzed the appraisals of the Income Funds prepared by
Valuation Associates, an independent real estate appraisal firm, as well as
conducted an independent summary valuation analysis of the Income Funds'
real estate assets,
(4) Conducted discussions with members of senior management and
representatives of the Income Funds and APF and with us concerning the
matters described in clauses (1) and (2) of this paragraph, as well as
their respective businesses and prospects before and after giving effect to
the Acquisition and the Income Funds' expected synergies,
(5) Reviewed valuation multiples of 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 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, us, their financial and legal advisors and our financial
and legal advisors,
(8) Reviewed the potential pro forma impact of the Acquisition including
the Income Funds' expected synergies,
(9) Reviewed drafts of the merger agreements relating to the
Acquisition, and
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(10) Reviewed such other financial studies and analyses and took into
account such other matters as it deemed necessary, including its assessment
of general economic, market and monetary conditions.
In preparing its fairness opinions, Merrill Lynch assumed and relied on the
accuracy and completeness of all information supplied or otherwise made
available to it, discussed with it or reviewed by or for it. Merrill Lynch has
not assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the CNL Restaurant Businesses, APF or the Income Funds or,
except for the Income Funds fairness opinion, been furnished with an
independent evaluation or appraisal of any of the assets or liabilities such
entities. In addition, in preparing the fairness opinions, Merrill Lynch did
not assume any obligation to conduct any physical inspection of the properties
or facilities of the CNL Restaurant Businesses, the Income Funds or APF. With
respect to the financial forecast information and the expected synergies
furnished to or discussed with it by the CNL Restaurant Businesses, the Income
Funds or APF, Merrill Lynch assumed that they had been reasonably prepared and
reflected the best currently available estimates and judgment of the respective
management teams of the CNL Restaurant Businesses, us and APF as to the
expected future financial performance of the CNL Restaurant Businesses, the
Income Funds and APF, as the case may be, and the expected synergies. Merrill
Lynch also did not assume any obligation to review the income tax consequences
of the acquisitions of the CNL Restaurant Businesses, the Income Funds, APF or
their respective equity holders. Merrill Lynch also assumed that the final form
of each of the merger agreements would be substantially similar to the last
drafts of such documents reviewed by Merrill Lynch.
Merrill Lynch has not been requested to update its fairness opinions prior
to the closings of the acquisitions of the Income Funds and the CNL Restaurant
Businesses, except in the event that not all of the Income Funds are acquired
by APF, in which case Merrill Lynch will update its opinion with respect to the
Income Funds to a date shortly before the date of the consent solicitation.
Merrill Lynch's opinions do not imply any conclusion as to the fairness of such
acquisitions on any date subsequent to the date of its opinions. To date, APF
reasonably believes that no material event has occurred which would adversely
affect the fairness determination if it were re-determined upon information as
of a more recent date.
Merrill Lynch's fairness opinions were necessarily based upon market,
economic and other conditions as they existed and could be evaluated, and on
the information made available to Merrill Lynch, as of the date of the fairness
opinions. Merrill Lynch assumed that in the course of obtaining the necessary
consents or approvals (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 the acquisitions. The CNL Restaurant Businesses
fairness opinion views the acquisitions of the CNL Restaurant Businesses, when
viewed together, as a single transaction, and does not cover the acquisition of
any CNL Restaurant Business as a stand-alone transaction. The Income Funds
fairness opinion views the Acquisition as a single transaction and does not
cover the acquisition of any Income Fund as a stand-alone transaction. In
addition, Merrill Lynch was advised by the APF Special Committee, and assumed
for purposes of the Income Funds fairness opinion, that the acquisitions of
each of the Income Funds would occur at the same time. Merrill Lynch did not
assume (1) the completion of the Acquisition in connection with its preparation
of the CNL Restaurant Businesses fairness opinion or (2) the completion of the
acquisition of the CNL Restaurant Businesses in connection with its preparation
of the Income Funds fairness opinion.
In connection with the rendering of the fairness opinions, Merrill Lynch
performed a variety of financial analyses. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to a partial analysis or summary description. Accordingly,
notwithstanding the separate analyses summarized below, Merrill Lynch believes
that its analyses must be 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
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summary set forth below does not purport to be a complete description of the
analyses performed by Merrill Lynch in arriving at its fairness opinions.
In performing its analyses, Merrill Lynch made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond our control and that of Merrill Lynch,
APF, the CNL Restaurant Businesses and the Income Funds. The analyses performed
by Merrill Lynch are not necessarily indicative of actual values or actual
future results, which may be significantly more or less favorable than
suggested by such analyses. Merrill Lynch did not assign any specific weight to
any of the other analyses described below and did not draw any specific
conclusions from or with regard to any one method of analysis. With respect to
the analysis of selected comparable companies and the analysis of selected
recent transactions summarized below, no comparable company utilized as a
comparison is identical to APF and the CNL Restaurant Businesses, and no
transaction is identical to either the Acquisition or the acquisition of the
CNL Restaurant Businesses. Accordingly, an analysis of comparable companies and
comparable business combinations is not mathematical; rather, it involves
complex considerations and judgments concerning the differences in financial
and operating characteristics of the companies and other factors that could
affect the values, as the case may be, of the CNL Restaurant Businesses, APF
and the companies to which they were compared. The analyses do not purport to
be appraisals or to reflect the prices at which the CNL Restaurant Businesses
or the Income Funds might actually be sold or the prices at which the APF
Shares might actually trade at the present time or any time in the future. In
addition, the fairness opinions were just one of many factors taken into
consideration by the APF Special Committee in its consideration of any of the
acquisitions. Accordingly, such analyses and estimates are inherently subject
to substantial uncertainty and Merrill Lynch does not assume responsibility for
the accuracy of such analyses or estimates.
The following is a summary of the analyses presented by Merrill Lynch to the
APF Special Committee in connection with Merrill Lynch's fairness opinions.
Valuation Analyses--CNL Restaurant Businesses
Analysis of Selected Comparable Publicly Traded Companies. Using publicly
available information and estimates of future financial results published by
First Call Corporation, a provider of real-time, commingled research, earnings
estimates and corporate information, Merrill Lynch compared certain financial
and operating information and ratios and projected financial performance for
the Advisor and the CNL Restaurant Financial 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
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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; (7) and five-year compounded annual growth rates in EPS of
15.0% to 25.0%, with a mean of 20.0% and a median of 20.0%.
Merrill Lynch's comparisons resulted in the following relevant ranges for
the asset management comparable companies as of February 5, 1999: (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 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
EPS 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%.
By applying what Merrill Lynch considered to be the relevant range of
multiples to CNL Restaurant Financial Services Group's 1999 projected net
income, this analysis yielded an implied range of values for CNL Restaurant
Financial Services Group of approximately $40.0 million to $62.2 million.
None of the companies utilized in the above analyses for comparative
purposes is, of course, identical to Advisor or the CNL Restaurant Financial
Services Group. Accordingly, a complete analysis of the results of the
foregoing calculations cannot be limited to a quantitative review of such
results and involves complex considerations and judgements concerning
differences in historical and projected financial and operating characteristics
of the CNL Restaurant Businesses comparable companies and other factors that
could affect the public trading value of the CNL Restaurant Businesses
comparable companies as well as that of the Advisor and the CNL Restaurant
Financial Services Group. In addition, the multiples of market value to
estimated EBITDA, funds from operations and earnings per share for the CNL
Restaurant Businesses comparable companies are based on projections prepared by
research analysts using only publicly available information. Accordingly, such
estimates may or may not be accurate.
Analysis of Selected Comparable Acquisition Transactions. Merrill Lynch
reviewed 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
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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 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 Restaurant Financial Services Group based upon financial
projections provided by the CNL Restaurant Financial Services Group's
management. Utilizing these projections, Merrill Lynch calculated a range of
total equity value for CNL Restaurant Financial Services Group based upon the
present value of the sum of (a) the CNL Restaurant Financial Services Group's
free cash flows from 1999 through 2003 and (b) the present value of the
terminal value of the CNL Restaurant Financial Services Group in 2003
calculated utilizing a range of multiples times CNL Restaurant Financial
Services Group's projected net income in such year. Applying discount rates
ranging from 20.0% to 30.0% and terminal multiples of projected net income
ranging from 5.0x to 7.0x, Merrill Lynch calculated the implied total equity
value of CNL Restaurant 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.
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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 several brokers,
investors and appraisers active in the triple-net lease market for restaurant
properties to help confirm the reasonableness of the capitalization rates
utilized in its NAV analysis. The Merrill Lynch analysis indicated an
aggregated value range for the Income Funds portfolio of $503.5 million to
$556.0 million.
Discounted Cash Flow Analysis. Merrill Lynch performed discounted cash flow
analyses on the Income Funds based upon financial projections provided by the
General Partners of the Income Funds. Utilizing these projections, Merrill
Lynch calculated a range of total equity values for the Income Funds based upon
the present value of the sum of (1) the Income Funds' free cash flows from 1999
through 2003 and (2) the projected terminal value of the Income Funds
calculated by applying a perpetual growth rate to 2003 free cash flow and
adding to such sum the net cash outstanding as of December 31, 1998. Applying
discount rates ranging from 11.0% to 12.0% and perpetual growth rates ranging
from 1.5% to 2.5%, Merrill Lynch calculated the implied total equity value of
the Income Funds in a range from $481.4 million to $571.2 million.
Pro Forma Merger Analysis--Income Funds
Merrill Lynch analyzed the pro forma effects resulting from the Acquisition,
including the potential impact on APF's projected FFO per share and the
anticipated accretion/dilution to APF's FFO per share resulting from the
Acquisition. Merrill Lynch observed that, after giving effect to the
Acquisition, inclusive of cost savings,
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the Acquisition would be accretive to APF's projected stand-alone FFO per share
in each of the years 1999 and 2000 and dilutive for the year 2001. The
transaction is dilutive in 2001 because APF stand alone has a growth rate in
excess of the Income Funds due to its ability to acquire new assets over time
which generates FFO per share growth in excess of that in an unlevered,
stagnant portfolio such as the Income Funds.
Pro Forma Contribution Analysis--Income Funds
Merrill Lynch also analyzed the pro forma effects resulting from the
contributions of the CNL Income Funds to APF (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 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: (1) 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; (2) 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; (3) 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 (4) a
range of five-year compounded annual growth rates in FFO per share of 6.0% to
20.0%, with a mean of 11.0% and a median of 9.5%. By applying what Merrill
Lynch considered to be the relevant range of multiples, this analysis yielded
an implied range of values for APF shares of $6.83 to $8.65 on a diluted basis
and prior to the reverse stock split.
Although not relevant to or impacting on its fairness determination with
respect to the acquisition of CNL Restaurant Businesses or the Acquisition,
Merrill Lynch in connection with its oral delivery of the fairness opinions
supplementally advised the APF Special Committee that over the period from June
1995 through August 1998 the APF comparable companies' median share price as a
multiple of current year FFO per share was in a range of 9.5x to approximately
11.5x which, if applied to the estimated 1999 FFO per share of APF, would imply
a per share value range of $8.65 to $10.47 on a diluted basis.
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Discounted Cash Flow Analysis. Merrill Lynch performed discounted cash flow
analyses on a stand- alone basis of APF based upon financial projections
provided by APF's management. Utilizing these projections, Merrill Lynch
calculated a range of equity values per share for APF based upon the present
value of the sum of (a) APF's dividends per share from 1999 through 2003 and
(b) the projected terminal value of APF in 2003 calculated utilizing a range of
multiples of times APF's projected FFO per share in such year. Applying
discount rates ranging from 9.5% to 11.5% and terminal multiples of projected
FFO per share ranging from 7.0x to 9.0x, Merrill Lynch calculated the implied
equity value per APF Share in a range from $10.38 to $13.40 on a diluted basis,
prior to the reverse stock split. Merrill Lynch then calculated a range of
equity values per APF Share based upon the present value of the sum of (a)
APF's FFO per share from 1999 through 2003 and (b) the projected terminal value
of APF in 2003 calculated utilizing a range of multiples of APF's projected FFO
per share in such year. Applying discount rates ranging from 9.5% to 11.5% and
terminal multiples of projected FFO per share ranging from 7.0x to 9.0x,
Merrill Lynch calculated the implied equity value per APF Share in a range from
$11.32 to $14.41 on a diluted basis, prior to the reverse stock split. Merrill
Lynch then calculated a range of equity values per APF Share based upon the
present value of the sum of (a) APF's adjusted FFO per share from 1999 through
2003 and (b) the projected terminal value of APF in 2003 calculated utilizing a
range of multiples times APF's projected FFO per share in such year. Applying
discount rates ranging from 9.5% to 11.5% and terminal multiples of projected
FFO per share ranging from 7.0x to 9.0x, Merrill Lynch calculated the implied
equity value per APF Share in a range from $11.30 to $14.40 on a diluted basis,
prior to the reverse stock split.
Pursuant to a letter agreement dated December 4, 1998, APF agreed to pay
Merrill Lynch a fee on the date Merrill Lynch delivered its fairness opinions
to the APF Special Committee as consideration for the rendering of the fairness
opinions, and if reasonably requested by APF prior to consummation of the
Acquisition, any bring-down opinions. In addition, APF agreed to reimburse
Merrill Lynch for its reasonable out-of-pocket expenses incurred in connection
with its services provided under such letter agreement, including the
reasonable fees and disbursements of its legal counsel. APF also agreed to
indemnify Merrill Lynch and 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 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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THE ACQUISITION
In order to effect the Acquisition of the Income Funds by APF or its
subsidiaries, the Income Funds that vote in favor of the Acquisition will be
merged with and into the Operating Partnership, which is a wholly-owned
subsidiary of APF. As described above, you will receive APF Shares in exchange
for your units, not Operating Partnership units. Following is an overview of
the principal components and other key aspects of the Acquisition, including
the merger. We note, however, that the description herein is a summary, and we
refer you to each of the Agreements and Plans of Merger, as amended, by and
between APF and each of the Income Funds, which we refer to as the Merger
Agreements, the copy or copies of which for your Income Fund(s) is or are
attached to the supplement accompanying this consent solicitation as Appendix
B, for a complete description of the merger of the Income Funds with and into
the Operating Partnership. By this reference to the Merger Agreements, we are
incorporating each of the Merger Agreements into this consent solicitation as
required by the federal securities laws.
Conditions to Acquisition
We have established certain conditions that must be satisfied in order for
the Acquisition to be consummated, including the following:
. the APF Shares must be listed on the NYSE prior to or concurrently with
the consummation of the Acquisition;
. the stockholders of APF must have approved the increase the number of
shares authorized in the Articles of Incorporation to be issued by APF,
at a special meeting of APF stockholders scheduled for , 1999.
. if fewer than all of the Income Funds approve the Acquisition, the
Special Committee of APF must receive a fairness opinion from Merrill
Lynch stating that the consideration payable to the approving Income
Funds is fair to APF from a financial point of view.
As a condition to closing the Acquisition of any Income Fund, the aggregate
amount of notes to be issued to Limited Partners who elect to receive notes may
not exceed 15% of the estimated value of APF Shares payable to such Income Fund
based on the exchange value. To the extent that the aggregate amount of notes
to be issued to the Limited Partners of any Fund exceeds this 15% limitation,
APF has the right, pursuant to the terms each Income Fund's Merger Agreement,
to decline to acquire the Income Fund.
It is presently APF's intention, upon listing of the APF Shares or shortly
thereafter to begin an underwritten public offering if market conditions
permit. Such a public offering, however, is not a condition to the closing of
the Acquisition.
Merger Agreements
If your Income Fund approves the Acquisition, that approval also constitutes
consent to the merger of the Income Fund with and into the Operating
Partnership pursuant to the terms and conditions of the Merger Agreement into
which your Income Fund enters. Each of the Merger Agreements generally provides
that in accordance with its terms, the Florida Revised Uniform Limited
Partnership Act (1986) and the Delaware Revised Uniform Limited Partnership
Act, at the time of filing of a merger certificate in each state, the Income
Funds that approve the Acquisition will be merged with and into the Operating
Partnership, and the Operating Partnership will continue as the surviving
entity. At the time the merger occurs, all of the restaurant properties and
other assets and the liabilities of each Income Fund approving the Acquisition
will be deemed to have been transferred to the Operating Partnership.
If your Income Fund approves the Acquisition, it will also have consented to
all actions necessary or appropriate to accomplish the Acquisition, provided
that, with respect to Income Funds XI through XVI, a
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separate vote will be required to approve any required amendments to the
partnership agreement governing that Income Fund. For information regarding how
your Income Fund's partnership agreement is being amended in connection with
approval of the Acquisition, we encourage you to read the supplement pertaining
to your Income Fund that accompanies this consent solicitation.
Approval and Recommendation of the General Partners
We, as the general partners of the Income Funds, have unanimously approved
the Acquisition. We believe that the terms of the Acquisition provide
substantial benefits and are fair to you. As such, we recommend that you vote
"For" approval of the Acquisition. For a specific description of our analysis
in reaching this recommendation, see "Our Recommendation and Fairness
Determination." You are, however, urged to consider the risks described in
"Risk Factors" and the comparison of an investment in the Income Funds versus
an investment in APF in "Comparison of Ownership of Units, Notes and APF
Shares." As we have already discussed, if your Income Fund elects to be
acquired in the Acquisition, you will have tax consequences, if you are subject
to federal income tax. Accordingly, we also recommend that you consult with
your tax advisor prior to casting your vote.
Vote Required for Approval of the Acquisition
In order for APF to acquire your Income Fund, Limited Partners holding a
majority of the outstanding units of the Income Fund must vote in favor of the
Acquisition. As long as a single Income Fund votes in favor of the Acquisition
and all of the conditions to closing are met, the Acquisition will be
consummated with respect to that Income Fund regardless of whether any other
Income Fund votes in favor of the Acquisition.
Consideration
If your Income Fund is acquired by APF, you will receive APF Shares unless
you vote against the Acquisition and affirmatively elect to receive notes
described below. If your Income Fund votes against the Acquisition, your Income
Fund will continue as an independent entity which will contract with APF to
provide restaurant property management services under the same terms pursuant
to which such services were previously provided by the Advisor.
APF Shares. The consideration payable to each Income Fund will consist of
APF Shares. The number of APF Shares that you will receive upon the
consummation of the Acquisition will be in accordance with your Income Fund's
partnership agreement which specifies how consideration is distributed to
partners in the event of a liquidation of your Income Fund. In addition, in the
event that your Income Fund approves the Acquisition, the aggregate number of
APF Shares paid to your Income Fund will be reduced by your Income Fund's
proportionate share of certain expenses of the Acquisition. You will receive
APF Shares unless you vote "Against" the Acquisition and expressly elect to
receive the notes, in which case you would receive notes in an amount equal to
97% of your portion of the APF Share consideration that would have otherwise
been paid to your Income Fund, based on the exchange value.
Notes. If your Fund votes in favor of and you have voted "Against" the
Acquisition, but you do not wish to own APF Shares, you can elect to receive
notes. The payment received by you or other Limited Partners who elect the
notes will be equal to 97% of your portion of the APF Share consideration that
would have otherwise been paid to your Income Fund, based on the exchange
value. The notes will bear interest at 7.0% annually and will mature on ,
2004 callable at any time.
General Partners. We, as the general partners of the Income Funds and
assuming that all of the Income Funds are acquired in the Acquisition, also
will receive an estimated aggregate of 138,150 APF Shares as a result of our
general partner interests in the Income Funds. The APF Shares allocated to your
Income Fund will be issued to and allocated between you and the other Limited
Partners, excluding those amounts that will be allocated to Limited Partners
that elected to receive the notes, and us in the same manner as net liquidation
proceeds would be distributed under your Income Fund's partnership agreement as
if your Income Fund's
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restaurant properties and other assets were sold, and your Income Fund were
distributing net liquidation proceeds in an amount equal to the value of the
number of APF Shares paid to each Income Fund by APF. For a discussion of the
portion of the consideration payable to us if your Income Fund is acquired, see
the supplement accompanying this consent solicitation.
Estimated Value of APF Shares Payable to Income Funds
The following table sets forth information for each Income Fund regarding
the estimated value of the consideration that your Income Fund will receive in
the Acquisition. The data in these tables assumes that none of the Limited
Partners has elected the notes. You should note that the APF Shares may trade
at prices significantly below the exchange value upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited
Partner
Investments
Original less any
Limited Distributions
Partner of Net Sales Number of Estimated Value
Investments Proceeds per APF Estimated of APF Shares per
less any Average Shares Value of Estimated Value Average $10,000
Distributions $10,000 Offered APF Shares Estimated of APF Shares Original Limited
of Net Sales Original to Income Payable to Acquisition after Acquisition Partner
Income Fund Proceeds(1) Investment(1) Fund Income Fund Expenses Expenses Investment
- ----------- ------------- ------------- --------- ----------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
I....................... $12,001,150 $8,001 578,880 $11,577,600 $158,000 $11,419,600 $7,613
II...................... 23,046,408 9,219 1,196,634 23,932,680 295,000 23,637,680 9,455
III..................... 22,253,502 8,901 1,041,451 20,829,020 266,000 20,563,020 8,225
IV...................... 28,226,458 9,409 1,334,008 26,680,160 344,000 26,336,160 8,779
V....................... 22,258,682 8,903 1,024,516 20,490,320 240,000 20,250,030 8,100
VI...................... 35,000,000 10,000 1,865,194 37,303,880 421,000 36,882,880 10,429
VII..................... 30,000,000 10,000 1,601,186 32,023,720 390,000 31,633,720 10,439
VIII.................... 35,000,000 10,000 2,021,318 40,426,360 460,000 39,966,360 11,261
IX...................... 35,000,000 10,000 1,850,049 37,000,980 437,000 36,563,980 10,351
X....................... 40,000,000 10,000 2,121,622 42,432,440 481,000 41,951,440 10,390
XI...................... 40,000,000 10,000 2,197,098 43,941,960 477,000 43,464,960 10,761
XII..................... 45,000,000 10,000 2,384,248 47,684,960 518,000 47,166,960 10,402
XIII.................... 40,000,000 10,000 1,943,093 38,861,860 441,000 38,420,860 9,605
XIV..................... 45,000,000 10,000 2,156,521 43,130,420 475,000 42,655,420 9,479
XV...................... 40,000,000 10,000 1,866,951 37,339,020 422,000 36,917,020 9,229
XVI..................... 45,000,000 10,000 2,160,474 43,209,480 473,000 42,736,480 9,497
</TABLE>
- --------
(1) The original Limited Partner investments in CNL Income Fund, Ltd., CNL
Income Fund II, Ltd., CNL Income Fund III, Ltd., CNL Income Fund IV, Ltd.
and CNL Income Fund V, Ltd. were $15,000,000, $25,000,000, $25,000,000,
$30,000,000 and $25,000,000, respectively. These columns reflect, as of
December 31, 1998 an adjustment to the Limited Partners' original
investments based on distributions of net sales proceeds received from
sales of properties (both as a special distribution and those that were
added to working capital and subsequently distributed) for CNL Income Fund,
Ltd. through CNL Income Fund V, Ltd.
No Fractional APF Shares
No fractional APF Shares will be issued by APF in the Acquisition. Each
Limited Partner who would otherwise be entitled to fractional APF Shares will
receive one APF Share for each fractional APF Share of 0.5 or greater. No APF
Shares will be issued for fractional APF Shares of less than 0.5. The maximum
amount which a Limited Partner could forfeit if such Limited Partner's
fractional share was 0.4999 is approximately $9.99, on a per Limited Partner,
not a per unit, basis, assuming the exchange value.
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Effect of the Acquisition on Limited Partners Who Vote Against the Acquisition
If you vote "Against" the Acquisition, you do not have a statutory right to
elect to be paid the appraised value of your interest in the Income Fund. If
you vote "Against" the Acquisition, you do have the right to elect to receive
notes if your Income Fund otherwise approves the Acquisition. Under this option
you would receive as consideration an amount of notes equal to 97% of your
portion of the APF Share consideration that would otherwise have been paid to
your Income Fund, based on the exchange value. The terms of the notes are
described in more detail under "Description of Notes" on page 173. The
liquidation valuation amount for your Income Fund is the amount estimated by
Valuation Associates as set forth in the supplement accompanying this consent
solicitation. Holders of the notes will be entitled to receive only the
principal and interest payments required by the terms of the notes and will not
have the rights of APF stockholders to participate in APF's dividends and
distributions or in any growth in the value of APF's stockholders' equity.
Effect of Acquisition on Income Funds Not Acquired
If APF does not acquire your Income Fund in the Acquisition, it will
continue to operate as a separate limited partnership with its own assets and
liabilities. There will be no change in the investment objectives of the Income
Fund, and the Income Fund will remain subject to the terms of its partnership
agreement. Since APF acquired the Advisor in its acquisition of the CNL
Restaurant Businesses, APF has assumed all of the management functions formerly
performed by the Advisor for the Income Funds. Thus, for any Income Funds not
acquired in the Acquisition, APF will provide such management functions.
Acquisition Expenses
If APF acquires your Income Fund in the Acquisition, your Income Fund will
pay a portion of the transaction costs as reflected in the supplement attached
to this consent solicitation. The number of APF Shares that you receive will
reflect a reduction for your Income Fund's expenses of the Acquisition.
If your Income Fund votes "Against" the Acquisition, then your Income Fund
will bear the portion of its Acquisition expenses based upon the percentage of
votes "For" the Acquisition, and we, as the general partners of the Income
Fund, will bear the portion of such Acquisition expenses based upon the
percentage of votes "Against" the Acquisition, plus any abstentions.
Accounting Treatment
The Acquisition will be accounted for as a purchase under GAAP.
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BENEFITS OF THE ACQUISITION
The Acquisition is being proposed at this time because we believe, after
considering the risks described in "Risk Factors" above, that the expected
benefits of the Acquisition outweigh the risks of the Acquisition, and we
believe that it is the best way for you to maximize returns on your investment.
You should carefully compare the risks of approving the Acquisition described
in "Risk Factors" with the expected benefits of your Income Fund being
acquired. The expected benefits include the following:
. Growth Potential. We believe that there is greater potential for
increased distributions to you as an APF stockholder and for appreciation
in the price of your APF Shares than there would be for you as a Limited
Partner of your Income Fund holding units. This growth potential results
from future acquisitions of additional restaurant properties, making
mortgage loans and engaging in financing activities. In addition, as a
result of APF's acquisition of the Advisor, we believe that the value of
APF Shares will be enhanced because, as discussed previously, the
investing public prefers internally-advised REITs. We believe that
substantial opportunities currently exist to acquire additional
restaurant properties at attractive prices and to make mortgage loans on
favorable terms. Your Income Fund cannot take advantage of such
opportunities because its partnership agreement generally restricts it
from borrowing, making additional acquisitions, developing restaurant
properties and making mortgage loans. In addition, because APF can use
cash, APF Shares or indebtedness to acquire additional restaurant
properties, APF will have a greater degree of flexibility in making
future acquisitions on advantageous economic terms. APF may also take
advantage of its structure as an umbrella partnership REIT, or an UPREIT,
to acquire additional portfolios of restaurant properties by using, as
consideration, units of its Operating Partnership. The use of Operating
Partnership units enables APF to make certain types of acquisitions in a
structure that permits the seller to defer the federal taxes due on the
sale while providing to sellers the same opportunities to participate in
APF's growth as the holders of APF Shares have. This ability gives APF a
tremendous advantage over other potential acquirors who do not have the
option of using partnership units, but instead may only acquire these
portfolios in a taxable manner using cash or capital stock, particularly
in instances where the sellers would have to recognize a substantial
amount of taxable gain as a result of the transaction. Also, APF's
ability to acquire portfolios in a manner that is tax-deferred for the
seller may allow APF to pay less consideration than would otherwise be
necessary in a taxable transaction due to the seller's ability to control
the timing of its gain recognition. We believe that as a result of its
publicly traded equity securities, large base of assets and ability to
incur indebtedness, APF will have substantial access to the capital
necessary for funding its operations, consummating future acquisitions
and making mortgage loans on attractive terms. However, APF currently
intends to maintain a ratio of total indebtedness to total assets of not
more than 45%.
. Diversification Benefit. The combination of the restaurant properties
owned by the Income Funds with APF's existing restaurant properties, as
well as future property acquisitions made by APF, will diversify your
investment over a larger number of properties, a broader group of
restaurant types and tenants and geographic locations. As of March 31,
1999, 88% of APF's tenants were the franchisor of the restaurant chain or
one of the top five franchisees of a particular restaurant chain based on
sales. Your investment also will become more diversified because a
portion of your investment in APF would be represented by the mortgage
loans that APF makes and by its other financing activities. Your
investment will also change from being an interest in a closed, finite-
life entity to an investment in a growing operating company. This
diversification will reduce the dependence of your investment upon the
performance of, and the exposure to the risks associated with, the
limited portfolio of restaurant properties currently owned by your Income
Fund.
. Operational Economies of Scale. The combination of the Income Funds into
the business already owned by APF will result in administrative and
operational economies of scale and cost savings for APF. Particularly
because the Income Funds are all public entities subject to the SEC's
reporting requirements, the combination of the Income Funds into a single
public company in APF would save considerable compliance costs. In
addition, if your Income Fund is acquired, you will no longer receive
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a Schedule K-1 for your tax reporting which generally was provided to you
each February. You will instead receive a Form 1099-DIV, a much simpler
reporting form, which will be provided each January.
. Liquidity. We believe the Acquisition provides you with liquidity of your
investment, which means your APF Shares would be freely tradable, for two
reasons. First, the market for the units you own is very limited because
the units are not listed on an exchange and, therefore, a potential buyer
has no real basis upon which to value the units. Because your Income
Fund's partnership agreement contains limitations on the transfer of your
units, you may not be able to sell your units even if you were able to
locate a willing buyer. As a stockholder of APF, you will own APF Shares
which will be listed on the NYSE, and therefore publicly valued, and
there will be no restrictions on your ability to sell the APF shares you
own. Second, as a holder of units that are non-tradable, the pool of
potential buyers for your units is limited and, to the extent that there
is a willing buyer, the buyer would likely acquire your units at a
substantial discount. As a holder of APF Shares and assuming APF acquires
all of the Income Funds, you will be a stockholder of a company that will
have total assets of approximately $1.5 billion and more than 71,000
stockholders and is expected to be one of the largest triple-net lease
REITs in the United States. Concurrently with or shortly following the
Acquisition, APF intends to engage in an underwritten public offering, if
market conditions permit. Such a public offering would promote a
following of APF by market analysts and institutional interest in APF
which, in turn, could further enhance the liquidity of the APF Shares.
. Future Development and Mortgage Loan Opportunities. As a result of APF's
acquisition of the CNL Restaurant Businesses, APF acquired restaurant
property development capabilities, mortgage origination, securitization
and servicing capabilities. Because APF has acquired these capabilities,
APF now has an additional pool of operators of national and regional
restaurant chains to which it can offer triple-net lease and mortgage
loan financing. APF's current financing commitments with operators of
national and regional restaurant chains either through triple-net lease
financing or mortgage loan financing are $427 million. APF is now in the
position to capitalize on these mortgage commitments and the
corresponding potential to grow the restaurant development and mortgage
financing businesses in the future. In addition, we believe APF's
relationship with CNL Advisory Services, Inc. will enhance APF's
financing business. CNL Advisory Services provides merger, acquisition,
divestiture and strategic planning services to operators of national and
regional restaurant chains which desire to grow or streamline their
business operations. For the quarter ended March 31, 1999, CNL Advisory
Services negotiated the acquisition of 23 restaurant properties having an
aggregate purchase price of in excess of $23.1 million. Through a 10 year
contractual arrangement, CNL Advisory Services has granted to APF the
right of first refusal to provide triple-net lease or mortgage loan
financing to CNL Advisory Services' clients. We believe this represents
an additional pipeline of potential customers to which APF can target its
financial products.
. Public Market Valuation of Assets. We believe that the public market
valuations of the equity securities of many publicly-traded real estate
companies, including REITs that focus on the restaurant industry, are in
part based on the growth potential of such companies and have
historically exceeded the net book values of their real estate assets.
You should be aware, however, that the APF Shares may not trade at a
premium to the net book values per unit of the Income Funds, and, to the
extent the APF Shares do trade at a premium, that the relative pricing
differential may change or be eliminated in the future.
. Regular Quarterly Cash Distributions. We expect that APF will make
regular quarterly cash distributions to its stockholders. While these
distributions may not be higher than certain of the Income Funds' current
distributions, the ability to receive distributions quarterly and in
regular amounts would be enhanced, because, unlike the Income Funds, APF
will have the ability to increase its portfolio of assets from which
income will be derived. Historically, APF's annualized distribution rate
on the APF Shares has been 7.625% based on the exchange value. While APF
cannot guarantee an increase in its distribution rate, APF believes that
as a result of its acquisition of the CNL Restaurant Businesses and the
Income Funds that it will be able to increase the yield. APF's belief is
based primarily on APF's ability to leverage its existing restaurant
properties and the restaurant properties acquired in the
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Acquisition, the synergies created as a result of the acquisition of the
CNL Restaurant Businesses and the Income Funds and the elimination of the
fees payable to the Advisor as a result of the acquisition of the Advisor.
. Greater Access to Capital. With publicly-traded equity securities, access
to debt financing, a larger base of assets and a greater equity value
than any of the Income Funds individually, APF expects to have greater
access to the capital necessary for funding its operations and
consummating acquisitions on more attractive terms than would be
available to any of the Income Funds individually. Also, APF's UPREIT
structure with the Operating Partnership provides it with additional
potential access to capital through the sale of the Operating
Partnership's units. This greater access to capital should provide
greater financial stability and growth to APF.
. Greater Reduction of Conflicts of Interest. APF will be operated as an
internally-advised REIT with management employed by APF, thereby
eliminating fees paid to the Advisor, reducing various conflicts of
interest and creating an alignment of the interests of the stockholders
and management. The persons engaged to manage APF will be directly
accountable to APF. They will not be employees of a separate management
company or investment advisor whose activities could be determined by
objectives and goals inconsistent with APF's financial objectives.
Management will owe its duty of loyalty only to APF. By contrast,
externally-advised limited partnerships and REITs may have no such
commitment from a management team to focus exclusively on their
portfolios.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of the Income Funds, we each have a contractual
obligation pursuant to your Income Fund's partnership agreement as well as an
obligation under state law to assess whether the terms of the Acquisition are
fair and equitable to the Limited Partners in each Income Fund without regard
to whether the Acquisition is fair and equitable to any of the other
participants, including the Limited Partners in other Income Funds. James M.
Seneff, Jr. and Robert A. Bourne act as the individual general partners of all
of the Income Funds and also as members of the Board of Directors of APF. While
Messrs. Seneff and Bourne have sought faithfully to discharge their obligations
to each Income Fund, there is an inherent conflict of interest in serving,
directly or indirectly, in a similar capacity with respect to all of the other
Income Funds and also on APF's Board of Directors.
Substantial Benefits to General Partners
As a result of the Acquisition, assuming all of the Income Funds are
acquired, we expect to receive three material benefits. These benefits include:
. With respect to our ownership in the Income Funds, we may be issued up to
an estimated aggregate of 138,150 APF Shares in accordance with the terms
of the Income Funds' partnership agreements. The 138,150 APF Shares
issued to us will have an estimated value, based on the exchange value,
of $2,763,000.
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr. Seneff
serving as Chairman of APF and Mr. Bourne serving as Vice-Chairman.
Furthermore, they will be entitled to receive performance-based
incentives, including stock options under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of the Income Funds, we are legally liable for all of
Income Funds liabilities to the extent that the Income Funds are unable
to satisfy such liabilities. Because the partnership agreement for each
Income Fund prohibits the Income Funds from incurring indebtedness, the
only liabilities the Income Funds' have are liabilities with respect to
their ongoing business operations. In the event that one or more Income
Funds are acquired by APF, we would be relieved of our legal obligation
to satisfy the liabilities of the acquired Income Fund or Income Funds.
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COMPARISON OF OWNERSHIP OF UNITS, NOTES AND APF SHARES
The information below highlights a number of the significant differences
between the Income Funds and APF relating to, among other things, form of
organization, investment objectives, policies and restrictions, asset
diversification, capitalization, management structure, compensation and fees
and investor rights, and compares certain legal rights associated with the
ownership of units, notes and APF Shares assuming APF's stockholders approve
certain amendments to APF's Articles of Incorporation. We have included these
comparisons to assist you in understanding how your investment will be changed
if, as a result of the Acquisition, your units are exchanged for APF Shares or
notes, if you choose to receive notes. This discussion is only a summary and
does not constitute a complete discussion of these matters, and we strongly
encourage you to carefully review the rest of this consent solicitation as well
as the accompanying supplement for additional important information.
Form of Organization and Purpose
- --------------------------------------------------------------------------------
APF
Income Funds
- --------------------------------------------------------------------------------
Each of the Income Funds is a APF is a Maryland corporation which
Florida limited partnership. The has qualified as a REIT during 1995,
Income Funds' primary business is to 1996, 1997 and 1998 and expects to
invest in fast-food, family-style continue to qualify as a REIT under
and casual dining restaurant the Code. APF's primary business,
properties. The Income Funds lease like the Income Funds, is the
the restaurant properties on a ownership and management of
triple-net lease basis to operators restaurant properties leased to
of national and regional restaurant operators of national and regional
chains. restaurant chains on a triple-net
basis. Upon APF's acquisition of the
CNL Restaurant Businesses described
on page 132, APF became a full-
service REIT with the ability to
offer a complete range of restaurant
property services to prospective
operators of national and regional
restaurant chains, from mortgage
loan financing, triple net lease
financing and securitizing mortgage
loans to site selection and
development.
APF will have broader business opportunities than your Income Fund and will
have access to additional financing opportunities which are currently not
accessible to your Income Fund. However, several of the additional financing
opportunities involve risks which do not exist in the case of your Income Fund,
and we encourage you to review "Risk Factors" for detailed description of such
risks.
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Length and Type of Investment
- --------------------------------------------------------------------------------
APF
Income Funds
- --------------------------------------------------------------------------------
Each Income Fund is a finite-life APF will have a perpetual term and
entity with a stated term which intends to continue its operations
expires between 2017 and 2031. As a for an indefinite time period. To
Limited Partner of your Income Fund, the extent APF sells or refinances
you are entitled to receive cash its assets, the net proceeds from
distributions out of your Income such sale or refinancing will
Fund's net operating income, if any, generally be reinvested in
and to receive cash distributions, additional restaurant properties or
if any, upon liquidation of your retained by APF for working capital
Income Fund's real estate and other corporate purposes, except
investments. to the extent distributions thereof
must be made to permit APF to
continue to qualify as a REIT for
tax purposes and that, pursuant to
the terms of the notes, repayments
of notes must be made to former
Limited Partners if APF sells
restaurant properties formerly held
by their Income Funds. As an APF
stockholder, you are entitled to
receive cash distributions, to the
extent APF's Board of Directors
determines. As a result of APF's
Shares being listed on the NYSE,
your shares will be freely tradable.
Therefore, you may decide to sell
your APF Shares at any time you so
determine.
The Income Funds are structured to dissolve when the assets of the Income
Funds are liquidated or after a period ranging between 30 and 40 years,
depending on the Income Fund, if no liquidation occurs sooner. In contrast, APF
generally is and will continue to be an operating company and will reinvest the
proceeds of asset dispositions, if any, in new restaurant properties or other
appropriate investments consistent with APF's investment objectives.
Business and Property Diversification
- --------------------------------------------------------------------------------
APF
Income Funds
- --------------------------------------------------------------------------------
The investment portfolio of each Assuming the acquisition of the CNL
Fund currently consists of between Restaurant Businesses had occurred
17 and 57 restaurant properties and on March 31, 1999, APF would have
other non-real estate assets, such had triple-net leases or mortgage
as cash and accounts receivable. loans with respect to 1,113
restaurant properties. Assuming the
CNL Restaurant Businesses and all of
the Income Funds had been acquired
by APF as of March 31, 1999, APF
wold have owned an interest in,
directly or indirectly through the
Operating Partnership, a portfolio
of 1,687 restaurant properties.
The investment portfolio of each Income Fund currently consists of between
17 and 57 restaurant properties. Through the Acquisition, and through
additional investments that may be made by APF from time to time, APF intends
to maintain an investment portfolio substantially larger and more diversified
than the assets of any of the Income Funds individually. APF's ability to make
mortgage loans further diversifies APF's business by providing it with the
ability to offer a full range of financing opportunities to operators of
national and regional restaurant chains. As a result of APF's acquisition of
the CNL Restaurant Financial Services Group, we believe that the pool of
targeted customers to which APF markets its financial products will increase.
In addition, the larger portfolio will diversify your investment over a broader
group of restaurant properties and type of financial investment, such as
mortgage loans and securitizations, with multiple brands
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and market segments and will reduce the dependence of your investment upon the
performance of, and the exposure to the risks associated with, any particular
group of restaurant properties currently owned by an individual Income Fund.
Borrowing Policies
- --------------------------------------------------------------------------------
APF
Income Funds
- --------------------------------------------------------------------------------
APF is not restricted under its
Your Income Fund cannot incur debt Articles of Incorporation from
or is restricted in the amount and incurring debt. At the time of the
nature of debt. Further, your Income Acquisition, APF will have a policy
Fund does not incur debt in the of incurring debt only if
ordinary course of business. immediately following such
incurrence the debt-to-total assets
ratio would be 45% or less. APF's
Board of Directors has the ability
to alter or eliminate this policy at
any time.
As a holder of APF Shares, you will become an investor in an entity that may
incur debt in the ordinary course of business and that invests proceeds from
borrowings. The ability of APF to incur debt in the ordinary course of business
increases the risk of your investment in APF Shares. At the time of the
Acquisition, APF will have a policy of incurring debt only if immediately
following such occurrence the debt-to-total assets ratio would be 45% or less.
Other Investment Restrictions
- --------------------------------------------------------------------------------
APF
Income Funds
- --------------------------------------------------------------------------------
The partnership agreements of the Neither APF's Articles of
Income Funds contain provisions that Incorporation nor its bylaws impose
prohibit (i) the investment in any restrictions upon the types of
restaurant properties of cash investments that may be made by APF,
available for distribution, (ii) the except that under the Articles of
purchase or lease of any real Incorporation, the Board of
property without the support of an Directors is prohibited from taking
appraisal report of an independent any action that would terminate
appraiser of restaurant properties, APF's status as a REIT, unless a
(iii) the acquisition of any majority of the stockholders vote to
property in exchange for interests terminate such status. APF's
in the Income Fund, (iv) the Articles of Incorporation and bylaws
acquisition of securities of other do not impose any restrictions upon
issuers or (v) the making of the vote to terminate APF's status
mortgage loans, junior deeds of as a REIT. APF's Articles of
trust or similar obligations. The Incorporation and Bylaws do not
Income Funds generally cannot raise impose any restrictions on dealings
additional funds for, or reinvest between APF and directors, officers
net sales or refinancing proceeds and APF's affiliates. Section 2-419
in, new investments, without of the Maryland General Corporation
amendments to their partnership Law, which we refer to as the MGCL,
agreements. In addition, a however, requires that the material
substantial number of the Income facts of the relationship, the
Funds cannot reinvest net sales or interest and the transaction must be
refinancing proceeds in new (1) disclosed to the Board of
investments or redeem or repurchase Directors and approved by the
units. affirmative vote of a majority of
the disinterested directors, (2)
disclosed to the stockholders and
approved by the affirmative vote of
a majority in interest of the
disinterested stockholders, or (3)
in fact fair and reasonable. In
addition, APF has adopted a policy
which requires that all contracts
and transactions between APF and
directors, officers or APF's
affiliates must be approved by the
affirmative vote of a majority of
the disinterested directors.
Some of the Income Fund's partnership agreements contain provisions which
prohibit or hinder further investment by the Income Fund. The organizational
documents of APF, however, provide APF with wide latitude in choosing the type
of investments it may pursue.
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Management Control
- --------------------------------------------------------------------------------
APF
Income Funds
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
As the general partners of the The Board of Directors will direct
Income Funds, we generally have the the management of APF's business and
exclusive right and power to conduct affairs subject to restrictions
the business and affairs of the contained in APF's Articles of
Income Funds and may appoint, Incorporation and bylaws and
contract or otherwise deal with any applicable law. The Board of
person, including employees of our Directors, the majority of which
affiliates, to perform any acts or will be independent directors, will
services for the Income Funds be elected at each annual meeting of
necessary or appropriate for the the stockholders. The policies
conduct of the business and affairs adopted by the Board of Directors
of the Income Funds. As a Limited may be altered or eliminated without
Partner of an Income Fund, you have a vote of the stockholders.
no right to participate in the Accordingly, except for their vote
management and control of your in the elections of directors and
Income Fund and have no voice in their vote in certain major
your Income Fund's affairs except on transactions, stockholders will have
limited matters that may be no control over the ordinary
submitted to a vote of the Limited business policies of APF. The Board
Partners under the terms of your of Directors cannot take any action
Income Fund's partnership agreement. that would terminate APF's status as
Under each Income Fund's partnership a REIT, without the majority vote of
agreement, Limited Partners have the the stock entitled to be voted.
right to remove us by a majority
vote in interest with or without
cause. In all cases, however, our
removal can only occur if the
Limited Partners find a successor
general partner.
</TABLE>
Under the partnership agreements for the Income Funds, we generally have the
exclusive right and power to conduct the business and affairs of the Income
Funds. As a Limited Partner, you have no voice in the affairs of the Income
Funds except on certain limited matters. All of the Income Funds permit our
removal by the Limited Partners without cause. Under APF's Articles of
Incorporation and bylaws, the Board of Directors directs management of APF.
Except for their vote in the elections of directors and their vote in major
transactions specified in the Articles of Incorporation and Maryland law,
stockholders have no control over the management of APF.
Fiduciary Duties
- --------------------------------------------------------------------------------
APF
Income Funds
- --------------------------------------------------------------------------------
Under the MGCL, the directors must
As a Florida limited partnership, perform their duties in good faith,
Florida law provides that we, as the in a manner that they reasonably
general partners of the Income believe to be in the best interests
Funds, are accountable as of APF and with the care of an
fiduciaries to the Income Funds and ordinary prudent person in a like
owe the Income Funds and their position. Directors of APF who act
Limited Partners a duty of loyalty in such a manner generally will not
and a duty of care, and are required be liable to APF for monetary
to exercise good faith and fair damages arising from their
dealing in conducting the affairs of activities.
the Income Funds. The duty of good
faith requires that we deal fairly
and with complete candor toward the
Limited Partners. The duty of
loyalty requires that, without the
Limited Partners' consent, we may
not have business or other interests
that are adverse to the interests of
the Income Funds. The duty of fair
dealing also requires that all
transactions between ourselves and
the Income Funds be fair in the
manner in which the transactions are
effected and in the amount of the
consideration received by us.
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We, as the general partners of the Income Funds, and the Board of Directors
of APF, respectively, owe fiduciary duties to their constituent parties. Some
courts have interpreted the fiduciary duties of the Board of Directors in the
same way as the duties of a general partner in a limited partnership. Other
courts, however, have suggested that our duties to you and the other Limited
Partners may be greater than the fiduciary duties of the directors of APF to
APF's stockholders. It is unclear, however, whether, or to what extent, there
are actual differences in such fiduciary duties.
Management's Liability and Indemnification
- --------------------------------------------------------------------------------
APF
Income Funds
- --------------------------------------------------------------------------------
Under Florida law, we, as the APF's Articles of Incorporation
general partners of the Income provide that the liability of APF's
Funds, are liable for the repayment directors and officers to APF and
of Income Fund obligations and its stockholders for money damages
debts, unless limitations upon such is limited to the fullest extent
liability are expressly stated in permitted under the MGCL. The
the document or instrument Articles of Incorporation and the
evidencing the obligation such as MGCL provide broad indemnification
the case in a loan structured as a to directors and officers, whether
nonrecourse obligation in which the serving APF or, at its request, any
lender has agreed not to pursue the other entity, to the fullest extent
Income Fund or us in case of default permitted under the MGCL. APF will
on the loan. Each Income Fund's indemnify its present and former
partnership agreement generally directors and officers, among
provides that we will not be held others, against judgments,
liable for any costs arising out of penalties, fines, settlements and
our action or inaction that we reasonable expenses actually
reasonably believed to be in the incurred by them in connection with
best interests of a Income Fund any proceeding to which they may be
except that we will be liable for made a party by reason of their
any costs which arise from our own service in those or other
fraud, negligence, misconduct or capacities, unless it is established
other breach of fiduciary duty. In that (a) the act or omission of the
cases in which we are indemnified, director or officer was material to
any indemnity is payable only from the matter giving rise to the
the assets of the Income Fund. proceeding and (1) was committed in
bad faith or (2) was the result of
active and deliberate dishonesty,
(b) the director or officer actually
received an improper personal
benefit in money, property or
services, or (c) in the case of any
criminal proceeding, the director or
officer had reasonable cause to
believe that the act or omission was
unlawful. Under the MGCL, however,
APF may not indemnify for an adverse
judgment in a suit by or in the
right of the corporation. The bylaws
of APF require that APF, as a
condition to advancing
indemnification expenses, obtain (a)
a written affirmation by the
director or officer of his good
faith belief that he has met the
standard of conduct necessary for
indemnification by APF as authorized
by the Bylaws and (b) a written
statement by or on his behalf to
repay the amount paid or reimbursed
by APF if it shall ultimately be
determined that the standard of
conduct was not met.
In each of the Income Funds, we will only be held liable for costs which
arise from our own fraud, negligence, misconduct or other breach of fiduciary
duty, and may be indemnified in certain cases. The liability of APF's directors
and officers is limited to the fullest extent permitted under the MGCL and such
directors and officers are indemnified by APF to the fullest extent permitted
by the MGCL.
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Antitakeover Provisions
- --------------------------------------------------------------------------------
APF
Income Funds
- --------------------------------------------------------------------------------
For each Income Fund, a change in APF's Articles of Incorporation and
management may be effected only by bylaws contain a number of
our removal as the general partners provisions that may delay or
of the Income Fund. In addition, we discourage a change in control of
may restrict transfers of your APF, even if the change in control
units. If a Limited Partner might be in the best interests of
transfers his, her or its units to stockholders. These provisions
another person, such person may not include, among others, (1)
become a substitute Limited Partner, authorized capital stock that may be
entitling him, her or it to vote on classified and issued as a variety
matters that may be submitted to the of equity securities in the
partners for approval, unless we discretion of the Board of
consent to such substitution. Directors, including securities
having superior voting rights to the
APF Shares, (2) restrictions on
business combinations with persons
who acquire more than a certain
percentage of APF Shares, (3) a
requirement that directors be
removed only for cause and only by a
vote of stockholders holding at
least a majority of all of the
shares entitled to be cast for the
election of directors, and (4)
certain ownership limitations which
are designed to protect APF's status
as a REIT under the Code. See
"Description of Capital Stock."
Certain provisions of the governing documents of the Income Funds and APF
could be used to deter attempts to obtain control of the Income Funds or APF in
transactions not approved by us or by APF's Board of Directors, respectively.
Sale
- --------------------------------------------------------------------------------
APF
Income Funds
- --------------------------------------------------------------------------------
Each Income Fund's partnership Under Section 3-105(d) of the MGCL,
agreement allows the sale of all or the Board of Directors is required
substantially all of the assets of to obtain approval of the
the Income Fund with the consent of stockholders by the affirmative vote
the Limited Partners holding a of two-thirds of all the votes
majority of the outstanding units. entitled to be cast on the matter in
order to sell all or substantially
all of the assets of APF. No
approval of the stockholders is
required for the sale of less than
substantially all of APF's assets.
Under each of the Income Fund's partnership agreements and APF's Articles of
Incorporation, the sale of assets may be effected with various specified levels
of Limited Partner or stockholder consent. Under the partnership agreements and
the Articles of Incorporation, the sale of assets which do not amount to all or
substantially all of the assets of the Income Funds or APF does not require any
consent of the Limited Partners or APF's stockholders, as applicable.
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Merger
- --------------------------------------------------------------------------------
APF
Income Funds
- --------------------------------------------------------------------------------
Under the MGCL, the Board of
Each Income Fund's partnership Directors is required to obtain
agreement is silent with respect to approval of the stockholders by the
the vote required for an Income Fund affirmative vote of two-thirds of
to participate in a merger. Under all the votes entitled to be cast on
Florida law, a merger may be the matter in order to merge or
effected upon our approval and the consolidate APF with another entity
approval of the Limited Partners not at least 90% controlled by it.
holding a majority of the
outstanding units, and the
satisfaction of other procedural
requirements.
Under applicable law and APF's Articles of Incorporation, mergers by the
respective Income Funds or APF is permitted subject to a certain level of
Limited Partner or APF stockholder consent, as applicable.
Dissolution
- --------------------------------------------------------------------------------
APF
Income Funds
- --------------------------------------------------------------------------------
Under the MGCL, the Board of
Each Income Fund may be dissolved Directors is required to obtain
with the consent of the Limited approval of the stockholders by the
Partners holding a majority of the affirmative vote of two-thirds of
outstanding units. all votes entitled to be cast on the
matter in order to dissolve APF.
Under each Income Fund's partnership agreement and APF's Articles of
Incorporation, the respective entities may be dissolved with the consent of a
certain percentage of the outstanding units or APF Shares, as applicable.
Amendments
- --------------------------------------------------------------------------------
APF
Income Funds
- --------------------------------------------------------------------------------
Amendments to APF's Articles of
Each Income Fund's partnership Incorporation must be approved by
agreement permits amendment of most the Board of Directors and by
of its provisions with the consent holders of a majority of the
of Limited Partners holding a outstanding APF Shares entitled to
majority of the outstanding units. be voted. An amendment relating to
Amendments to the Income Funds' termination of REIT status requires
partnership agreements that require a vote of the holders of a majority
unanimous consent include: (1) of the stock entitled to be voted.
converting the interest of a Limited
Partner into a general partner's
interest, (2) any act adversely
affecting the liability of a Limited
Partner, (3) altering the interest
of a Limited Partner in net profits,
net losses, gain, loss, or
distributions of cash available for
distribution, sale proceeds or
refinancing proceeds, (4) reducing
the percentage of partners required
to consent to any action in the
partnership agreements, or (5)
limiting in any manner our liability
as general partners.
We may amend an Income Fund's
partnership agreement without the
consent of the Limited Partners to
reflect a ministerial amendment,
and, specifically with respect to
CNL Income Funds XI to XVI,
amendment required by state law.
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Amendment to each Income Fund's partnership agreement may be made with the
consent of the Limited Partners. Amendment of APF's Articles of Incorporation
requires the consent of both the Board of Directors and a certain percentage of
the votes entitled to be cast at a meeting of APF stockholders.
Compensation and Fees
- --------------------------------------------------------------------------------
Funds APF
- --------------------------------------------------------------------------------
Share of Distributable Net Cash Flow
<TABLE>
<S> <C>
Each Income Fund's partnership APF will pay all management
agreement provides that we, as expenses, including salaries and
general partners of the Income Fund, other compensation payable to
are entitled to receive a percentage employees of APF, but as an
of the net cash available for internally-advised REIT, APF will
distribution to the partners of the not otherwise pay a portion of net
Income Fund. For CNL Income Funds I cash flow or allocations to
through XVI, this percentage equals management, except to the extent
1%. they are entitled to such as a
result of owning APF Shares. Such
management expenses will reduce the
funds available for distribution by
APF.
In each of the Income Funds, our
right to receive a portion of
distributable cash flow is
subordinated to your right to
receive a preferred return on your
investment.
</TABLE>
Management Fees
<TABLE>
<S> <C>
Each Income Fund's partnership The officers and directors of APF
agreement provides for the payment will receive compensation for their
of a management fee to the Advisor, services as described herein under
our affiliate, which provides the "Management." APF will not otherwise
day-to-day management operation of pay any management fees. In
the Income Fund's assets. For CNL addition, some employees of APF may
Income Fund, Ltd. through CNL Income receive incentive compensation based
Fund III, Ltd. the management fee upon APF's profitability.
equals 0.5% of the value of the
total assets under management valued
at cost. For CNL Income Fund IV,
Ltd. through CNL Income Funds XVI,
Ltd., the management fee equals 1%
of the gross revenues derived from
the restaurant properties.
In each of the Income Funds, the
Advisor's right to receive this fee
is subordinated to your right to
receive a preferred return on your
investment.
</TABLE>
Real Estate Disposition Fee
<TABLE>
<S> <C>
Each Income Fund's partnership None.
agreement provides for the payment
to the Income Fund's Advisor, our
affiliate, of a real estate
disposition fee upon the sale of a
restaurant property equal to the
lesser of (1) a competitive real
estate brokerage commission, or
(2) 3% of sales price of the
restaurant property or properties.
In each of the Income Funds, the
Advisor's right to receive this fee
is subordinate to your right to
receive a cumulative preferred
return on your investment plus your
aggregate adjusted capital
contributions.
</TABLE>
108
<PAGE>
Share of Distributions of Net Sales Proceeds (Not in Liquidation)
None. Distributions made by APF to
Each Income Fund's partnership its stockholders will be based
agreement provides for the payment solely on the profitability of APF
to us of a portion of distributable and will not be based on asset
net sales proceeds following the dispositions.
payments to the Limited Partners of
preferred returns and returns of
capital required by the partnership
agreements. For all of the Income
Funds, our portion of distributable
net sales proceeds equals 5% of the
Income Fund's distribution of the
net sale proceeds from the
disposition of a restaurant
property.
Our right to receive this fee is
subordinated to your right to
receive a cumulative preferred
return on your investment plus your
aggregate invested capital.
Reimbursement of Expenses
As a full-service REIT, APF's
Each Income Fund's partnership expenses will be paid from its
agreement provides that operating revenues as expenses are incurred.
expenses, which, in general, are
those expenses relating to the
administration of the Income Fund by
the Advisor, will be reimbursed at
the lower of cost or 90% percent of
the prevailing rate at which
comparable services could have been
obtained by the Income Fund in the
same geographical area.
One of the benefits of the Acquisition is to eliminate the conflicts
currently existing among the Income Funds, our affiliates and us, as the
general partners of the Income Funds. For a summary of the compensation and
fees paid to the general partners over the last three years, see "Compensation,
Reimbursements and Distributions" on page 179.
Review of Investor Lists
- --------------------------------------------------------------------------------
APF
Income Funds
- --------------------------------------------------------------------------------
Under the MGCL, as a stockholder you
Under your Income Fund's partnership must hold at least 5% of the
agreement, you are entitled, at your outstanding APF Shares before you
expense and upon reasonable request, have the right to request a list of
to obtain a list of the other APF's stockholders. If you meet this
Limited Partners in your Income requirement, you may, upon written
Fund. request, inspect and, at your
expense, copy during normal business
hours the list of APF's
stockholders.
Subject to certain limitations, the Limited Partners of Income Funds and the
stockholders of APF can inspect and, at their own expense, make copies of
investor lists.
109
<PAGE>
The following discussion describes the investment attributes and legal
rights associated with your ownership of units, notes and APF Shares.
Nature of Investment
- --------------------------------------------------------------------------------
Units Notes APF Shares
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
The units you hold The notes will be The APF Shares
constitute equity senior, unsecured constitute equity
interests entitling you obligations of APF and interests in APF. As a
to your proportionate will be issued pursuant holder of APF Shares,
share, as determined by to an indenture you will be entitled to
the number of units you qualified under the your proportionate
own, of cash Trust Indenture Act of share, as determined by
distributions made to 1939, as amended. APF the number APF Shares
the partners of your may issue additional you own, of any
Income Fund. The senior debt, which may dividends or
partnership agreement be secured, only in distributions paid with
for each Income Fund compliance with the respect to the APF
specifies how the cash covenants contained in Shares. The dividends
available for the notes and the payable to you are not
distribution, whether indenture for the fixed in amount and are
arising from operation issuance of senior debt. only paid if, when and
or sales or refinancing, The notes will bear as declared by the Board
is to be shared among interest at 7.0% of Directors. In order
us, as general partners annually and will mature to continue to qualify
of your Income Fund, and on , 2004. Prior to as a REIT, APF must
you and the other maturity, interest only distribute at least 95%
Limited Partners of your payments will be made to of its taxable income,
Income Fund. The you, on a semi-annual excluding capital gains,
distributions payable by basis, and on , and any taxable income,
your Income Fund to its 2004, the outstanding including capital gains,
partners are not fixed principal balance, plus not distributed will be
in amount and depend interest accruing since subject to corporate
upon the operating the last payment, will income tax.
results and net sales or be payable to you.
refinancing proceeds
available from the
disposition of your
Income Fund's assets.
Your Income Fund cannot
raise additional funds
for and generally cannot
reinvest net sales or
refinancing proceeds in
new investments, without
amendments to the
partnership agreement of
your Income Fund.
</TABLE>
The units and the APF Shares constitute equity interests. As a Limited
Partner of your Income Fund, you are entitled to your proportionate share of
the cash distributions of your Income Fund, and as a stockholder of APF, you
will be entitled to your proportionate share of any dividends or distributions
of APF which are paid with respect to the APF Shares. Distributions and
dividends payable with respect to units and APF Shares depend on the
performance of the Income Funds and APF, as applicable. In contrast, the notes
constitute senior unsecured debt obligations of APF providing for semi-annual
payments of interest only until the notes mature, at which time accrued
interest and the principal balance must be paid.
110
<PAGE>
Additional Equity/
Potential Dilution
- --------------------------------------------------------------------------------
Units Notes APF Shares
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Since your Income Fund Since the notes will be At the discretion of the
cannot issue additional unsecured debt Board of Directors, APF
equity securities, there obligations of APF, may issue additional
can be no dilution of their payment will have equity securities,
distributions to you and priority over dividends including APF Shares and
the other Limited or distributions payable shares which may be
Partners. to APF's stockholders. classified as one or
However, there are no more classes or series
restrictions on APF's of common or preferred
authority to grant shares and contain
secured debt certain preferences. The
obligations, such as issuance of additional
mortgages, liens or equity securities by APF
other security interests will reduce your
in APF's real and percentage ownership
personal property, and interest in APF.
such security interests,
if granted, would permit
the holders thereof to
have a priority claim
against such collateral
in the event of APF's
default under the
secured obligations.
Also, such secured
obligations would have
payment priority over
the notes and other
unsecured indebtedness
of APF.
</TABLE>
As an APF stockholder, your percentage ownership interest in APF will be
decreased if APF issues additional APF Shares. Furthermore, APF may issue
preferred stock with priorities or preferences with respect to dividends and
liquidation proceeds. Payment of the notes will have priority over
distributions on the APF Shares you hold or any class of equity securities that
might be issued by APF. Any senior secured obligations issued by APF, however,
will have superior claims against the collateral given for security in the
event APF defaults in the payments of those secured obligations and will have
payment priority over the notes and other unsecured indebtedness of APF.
Liability of Investors
- --------------------------------------------------------------------------------
Units Notes APF Shares
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Under your Income Fund's As a holder of notes, Under Maryland law, you
partnership agreement you will not be will not be personally
and under Florida law, personally liable for liable for the debts or
your liability for your the debts and obligations of APF.
Income Fund's debts and obligations of APF.
obligations is generally
limited to the amount of
your investment in the
Income Fund, together
with an interest in
undistributed income, if
any.
</TABLE>
As a holder of units, your liability for the debts and obligations of your
Income Fund is limited to the amount of your investment. As a holder of notes
or APF Shares, you generally would have no liability for the debts and
obligations of APF.
111
<PAGE>
Voting Rights
- --------------------------------------------------------------------------------
Units Notes APF Shares
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Generally, with some Under the Indenture, you APF is managed and
exceptions, you and the will be entitled, as a controlled by a Board of
other Limited Partners holder of notes, to vote Directors elected by the
of your Income Fund have on certain major APF stockholders at the
voting rights only on transactions, including annual meeting of APF.
significant Income Fund the merger of APF or the The MGCL requires that
transactions to the sale of all or major transactions such
extent provided in your substantially all of as the sale of all or
Income Fund's APF's assets. substantial all of APF's
partnership agreement. assets, and amendments
Such voting rights to APF's Articles of
include incurrence of Incorporation, may not
debt, sale of all or be consummated without
substantially all of the the approval of
assets of your Income stockholders. You will
Fund, certain amendments have one vote for each
to the partnership APF Share you own. APF's
agreement or our Articles of
removal. Incorporation permits
the Board of Directors
to classify and issue
shares of capital stock
in one or more series
having voting power
which may differ from
that of your APF Shares.
See "Description of
Capital Stock."
</TABLE>
As a Limited Partner of your Income Fund or as a holder of notes of APF, you
have or will have limited voting rights. As a stockholder of APF, you will have
voting rights that permit you to elect the Board of Directors and to approve or
disapprove certain major transactions.
Liquidity
- --------------------------------------------------------------------------------
Units Notes APF Shares
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
The APF Shares will be
The units that represent While the notes you hold freely transferable upon
your ownership interest will be freely registration under the
in your Income Fund are transferable, APF will Securities Act. The APF
relatively illiquid not list the notes, and Shares will be listed on
investments, which means no market for the notes the NYSE, and APF
not freely tradeable or is expected to develop. expects a public market
transferable, with a You should not elect to for the APF Shares to
limited resale market. receive notes unless you develop. The breadth and
The trading volume of are prepared to hold the strength of this market
the units in the resale notes until their will depend, among other
market is limited and maturity which is things, upon the number
the prices at which approximately five years of APF Shares
certain Income Funds' from the date that the outstanding, APF's
units trade are Acquisition occurs. You financial results and
generally not equal to should note that, due to prospects, and the
their net book value. In the lack of market in general interest in
addition, applicable the notes and their APF's dividend yield and
federal income tax rules consequent lack of growth potential
and the partnership liquidity, your tax compared to that of
agreements of the Income liability as a result of other debt and equity
Funds effectively the Acquisition will securities. See "The
prevent the development exceed the liquid assets Acquisition--
of a more active or that you receive if you Consideration."
substantial market for have elected to receive
these units. Neither you notes.
nor any other Limited
Partner, individually,
can require an Income
Fund to dispose of its
assets or redeem your or
any other Limited
Partner's interest in
the Income Fund.
</TABLE>
112
<PAGE>
Your units have a limited resale market. If APF acquires your Income Fund in
the Acquisition and you receive APF Shares, the APF Shares you receive will be
freely transferable upon registration under the Securities Act and listing on
the NYSE. As a stockholder of APF, you will have the opportunity to achieve
liquidity by trading the APF Shares in the public market. If you elect to
receive notes, however, your ability to achieve liquidity in the notes will be
much more limited since the notes will not be listed on the NYSE.
Expected Distributions and Payments
- --------------------------------------------------------------------------------
Units Notes APF Shares
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Your Income Fund makes As a holder of notes, APF intends to make
quarterly distributions. you will generally be quarterly dividend and
Amounts distributed to entitled to receive only distribution payments to
you are derived from the principal and its stockholders. The
your proportionate share interest payments amount of such dividends
of cash flow from required under the and distributions will
operations or cash flow notes. You will have no be established by the
from sales or right to participate in Board of Directors,
financings. See any profits derived from taking into account the
"Selected Financial operations of any of cash needs of APF, funds
Information of the APF's assets, including from operations, yields
Income Funds" for a restaurant properties available to
presentation of the cash acquired as part of the stockholders, the market
distributions to you and Acquisition. price for the APF Shares
the other Limited and the requirements of
Partners of the Income the Code for
Funds over the five most qualification as a REIT.
recent calendar years. Under the Code, APF is
required to distribute
at least 95% of REIT
taxable income. REIT
taxable income generally
includes taxable income
from operations,
including depreciation
and deductions, but
excludes gains from the
sale or distributions
from refinancing of
properties. Unlike the
Income Funds, APF is not
required to distribute
net proceeds from the
sale or refinancing of
restaurant properties.
</TABLE>
Dividends will be paid if, as and when declared by the Board of Directors of
APF in its discretion out of funds legally available for such purpose. If you
become a stockholder of APF, you will receive your proportionate share of the
dividends and distributions made with respect to the APF Shares. The amount of
such dividends and distributions will depend upon APF's revenues, operating
expenses, debt service payments, capital expenditures, reserves and funds set
aside for expansion. Interest payments made on the notes will be paid prior to
any distributions with respect to the APF Shares and will reduce the amount
otherwise distributable to APF's stockholders.
113
<PAGE>
Taxation of Taxable Investors
- --------------------------------------------------------------------------------
Units Notes APF Shares
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Your Income Fund, as a Interest payments made APF intends to continue
partnership for federal on the notes will to qualify and be taxed
income tax purposes, is constitute portfolio as a REIT. As a REIT,
not subject to tax, but income which cannot be APF generally is
you must report your offset by "passive permitted to deduct
allocable share of losses" from other distributions to its
partnership income and investments. During stockholders, which
loss on your tax return, January of each year, effectively eliminates
whether or not cash holders of notes will the corporate level of
distributions are made receive from APF IRS the "double taxation"
to you. Income from your Form 1099-INT to show (imposed at the
Income Fund generally the interest payments corporate and
constitutes "passive made by APF during the stockholder levels) that
income" to you, which prior calendar year. typically results when a
can generally be offset corporation earns income
by "passive losses" from and distributes that
your other investments. income to stockholders
Generally, by February in the form of
15th of each year, you dividends. Dividends
receive an annual received by you as an
Schedule K-1 with APF stockholder will
respect to information constitute portfolio
about your Income Fund income, which cannot be
for inclusion on your offset by "passive
federal income tax losses" from other
returns. investments. However,
income that you receive
from APF, in certain
circumstances, may be
used to offset
investment interest
expense from other
investments. Generally,
distributions from
earnings and profits
will be reported as
ordinary income and
distributions in excess
of earnings and profits
(generally, as a result
of depreciation
deductions) will be
reported as non-taxable
distributions and reduce
the stockholders' basis
in his, her or its APF
Shares. During January
of each year, APF
stockholders will be
mailed the less complex
Form 1099-DIV used by
corporations that pay
dividends to their
stockholders. APF
stockholders are not
required to file state
income tax returns
and/or pay state income
taxes outside of their
state of residence with
respect to APF's
operations. APF will be
required to pay state
income taxes in certain
states where it is
qualified to do
business.
</TABLE>
You must file state
income tax returns and
incur state income tax
in most states in which
your Income Fund has
restaurant properties.
Each Income Fund is a pass-through entity whose income and loss is not taxed
at the entity level but instead allocated directly to us, as the general
partners, and to you and the other Limited Partners. You are taxed on income or
loss allocated to you whether or not cash distributions are made to you. In
contrast, APF intends to continue to qualify as a REIT allowing it to deduct
dividends paid to its stockholders. To the extent
114
<PAGE>
APF has taxable income, after taking into account the "dividends paid"
deduction, such income is taxed at APF's level at the standard corporate tax
rates. Dividends paid to APF stockholders will constitute portfolio income and
not passive income. Holders of notes will recognize portfolio income on the
interest payments received on the notes.
Taxation of Tax-Exempt Investors
- --------------------------------------------------------------------------------
Units Notes APF Shares
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Dividends received from
None of the type of Interest income received APF by tax-exempt
income distributed by by certain tax-exempt investors should not
the Income Funds is investors will not be constitute UBTI if the
characterized as characterized as UBTI so tax-exempt APF
unrelated business long as the tax-exempt stockholder did not
taxable income, or UBTI, investor does not hold finance its acquisition
if the tax-exempt its notes subject to of the APF Shares with
investor did not finance acquisition indebtedness.
its acquisition of the indebtedness.
units with indebtedness.
</TABLE>
A tax-exempt entity is treated as owning and carrying on the business
activity conducted by a partnership in which such entity owns an interest.
Accordingly, to the extent a tax-exempt entity owns units in the Income Funds,
the income received by the Income Funds must not constitute UBTI in order for
the tax-exempt investor to avoid taxation. In general, income attributable to
the APF Shares is not UBTI. Similarly, as a general matter, interest income
received under the notes is not UBTI.
115
<PAGE>
VOTING PROCEDURES
Distribution of Solicitation Materials
This consent solicitation, together with the accompanying transmittal
letter, the power of attorney and the Limited Partner consent, constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain their votes "For" or "Against" your Income Fund's participation in
the Acquisition. Please note that we refer, collectively, to the power of
attorney and Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, which is an indirect, wholly-owned limited partnership of APF, in
the manner described below and in the supplement relating to your Income Fund.
Therefore, if you are not planning to attend the special meeting of the Limited
Partners of your Income Fund and vote in person, you should complete and return
the consent form before the expiration of the solicitation period, which is the
time period during which Limited Partners may vote "For" or "Against" the
Acquisition. The solicitation period will commence upon delivery of the
solicitation materials to you on or about , 1999, and will continue until
the later of (a) , 1999, a date not less than 60 calendar days from the
initial delivery of the solicitation materials, or (b) such later date as we
may select and as to which we give you notice. At our discretion, we may elect
to extend the solicitation period. Under no circumstances will the solicitation
period be extended beyond March 31, 2000. Any consent form received by the
company that we hired to tabulate your votes, Corporate Election Services,
prior to 5:00 p.m., Eastern time, on the last day of the solicitation period
will be effective provided that such consent form has been properly completed
and signed. If you fail to return a signed consent form by the end of the
solicitation period, your units will be counted as voting "Against" the
Acquisition and you will receive APF Shares if your Income Fund is acquired. If
you prefer, you may instead vote by telephone according to the instructions on
your consent form.
The consent forms for each Income Fund are filed as exhibit 99.2 to this
filing of the Registration Statement on Form S-4 of which this consent
solicitation constitutes a part. The consent form consists of two parts. Part A
seeks your consent to the Acquisition and related matters. The exact matters
which a vote in favor of the Acquisition will be deemed to approve differ for
each Income Fund and are explained in detail in the individual supplement for
each Income Fund. CNL Income Funds XI through XVI are required to have
amendments to their partnership agreements in order to permit APF to acquire
such Income Funds in the Acquisition. You should review the supplement to see
if or how your Income Fund's partnership agreement will require amendment. If
you have interests in more than one Income Fund, you will receive multiple
supplements and consent forms which will provide for separate votes for each
Income Fund in which you own an interest. If you return a signed consent form
but fail to indicate whether you are voting "For" or "Against" any matter you
will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without needing to obtain your signature on multiple
documents.
Special Meetings
We, as general partners of the Income Funds, have scheduled special meetings
of the Limited Partners of each of the Income Funds to discuss the solicitation
materials and the terms of the Acquisition prior to voting on the Acquisition.
The special meetings will be held at 10:00 a.m., Eastern time, on , 1999,
at . We, APF's management, and D.F. King & Co. intend to solicit actively
your support for the Acquisition and would like to use the special meetings to
answer questions about the Acquisition and the solicitation materials and to
explain the reasons for the recommendation that you vote to approve the
116
<PAGE>
Acquisition. Costs of solicitation will be allocated as set forth in "The
Acquisition--Acquisition Expenses." No person will receive compensation
contingent upon solicitation of a favorable vote.
Required Vote and Other Conditions
In order for APF to acquire your Income Fund, Limited Partners of your
Income Fund holding a majority of the outstanding units and we, as the general
partners of your Income Fund, must approve the Acquisition and, with respect to
certain Income Funds, approve the amendments to the Income Fund's partnership
agreement. For a more detailed discussion relating to your Income Fund and
whether any amendment is required, please review the accompanying supplement.
See "The Acquisition."
Record Date and Outstanding Partnership Units. The record date is ,
1999 for all Income Funds. As of March 31, 1999, the following number of units
were held of record by the number of Limited Partners indicated below:
<TABLE>
<CAPTION>
Number of Units
Number of Number of Units Held Required for Approval
Income Fund Limited Partners of Record of Acquisition
- ----------- ---------------- -------------------- ---------------------
<S> <C> <C> <C>
CNL Income Fund, Ltd 1,065 30,000 15,001
CNL Income Fund II, Ltd 2,207 50,000 25,001
CNL Income Fund III, Ltd 2,036 50,000 25,001
CNL Income Fund IV, Ltd 2,916 60,000 30,001
CNL Income Fund V, Ltd 2,477 50,000 25,001
CNL Income Fund VI, Ltd 2,986 70,000 35,001
CNL Income Fund VII, Ltd 3,151 30,000,000 15,000,001
CNL Income Fund VIII,
Ltd 3,429 35,000,000 17,500,001
CNL Income Fund IX, Ltd 3,390 3,500,000 1,750,001
CNL Income Fund X, Ltd 3,523 4,000,000 2,000,001
CNL Income Fund XI, Ltd 3,184 4,000,000 2,000,001
CNL Income Fund XII, Ltd 3,453 4,500,000 2,250,001
CNL Income Fund XIII,
Ltd 3,049 4,000,000 2,000,001
CNL Income Fund XIV, Ltd 3,015 4,500,000 2,250,001
CNL Income Fund XV, Ltd 2,705 4,000,000 2,000,001
CNL Income Fund XVI, Ltd 3,022 4,500,000 2,250,001
</TABLE>
You are entitled to one vote for each unit held. Accordingly, the number of
units entitled to vote with respect to the Acquisition is equivalent to the
number of units held of record at the record date.
Investor Lists. Under Rule 14a-7 of the Securities Exchange Act of 1934, as
amended, or the Exchange Act, your Income Fund is required, upon your written
request, to provide you with the following information:
. a statement of the approximate number of Limited Partners in your Income
Fund and
. the estimated cost of mailing a proxy statement, form of proxy or other
similar communication to your Income Fund's Limited Partners.
In addition, you have the right, at our option, either (1) to have your
Income Fund mail, at your expense, copies of any consent statement, consent
form or other soliciting materials furnished by you to the other Limited
Partners of your Income Fund or (2) to have the Income Fund deliver to you,
within five business days of the receipt of the request, a reasonably current
list of the names, addresses and units held by the Limited Partners of your
Income Fund. The right to receive the list of Limited Partners is subject to
your payment of the cost of mailing and duplication at a rate of $0.25 per
page.
Tabulation of Votes. A tabulation system administered by Corporate Election
Services will tabulate the votes. Abstentions will be tabulated with respect to
the Acquisition and related matters. Abstentions will have the effect of a
117
<PAGE>
vote against the Acquisition, as will the failure to return a consent form and
broker nonvotes where a broker submits a consent but does not have authority to
vote a Limited Partner's units on one or more matters.
Revocability of Consent. You can change your vote at any time before your
consent is voted at the special meeting. You can do this in three ways: first,
you can send us a written statement that you would like to revoke your consent;
second, you can send us a new consent form; or third, you can attend the
special meeting and vote in person.
118
<PAGE>
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 ("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.
(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 which occurred on , 1999, as
discussed on pages 132-133 and 141-143 of this consent solicitation.
The following information, including, without limitation, the Year 2000
readiness disclosure and the quantitative and qualitative disclosures about
market risk that are not historical facts, may be forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements generally are
characterized by the use of terms such as "believe," "expect" and "may."
Although APF believes that the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, APF's actual results could
differ materially from those set forth in the forward-looking statements.
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 consent solicitation, the Operating Partnership. Upon
listing the APF Shares with the NYSE, APF may use the Operating Partnership
units, which mirror APF Shares and will be exchangeable into APF Shares on a
one-for-one basis, as currency in acquisitions of restaurant properties in the
future. APF's ability to acquire restaurant properties using Operating
Partnership units may make certain acquisitions more attractive to potential
sellers because the transactions would permit a tax deferral and would give the
seller control over the timing of gain recognition and payment of federal
income taxes. Management anticipates that the use of the Operating Partnership
units will provide APF additional acquisition opportunities.
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ORGANIZATIONAL CHART FOR APF AND SUBSIDIARIES
PRIOR TO AQUISTIONS OF CNL RESTAURANT BUSINESSES
AND THE AQUISITION
<TABLE>
<CAPTION>
---------------------------
APF(1)
---------------------------
100% owned subsidiary 100% owned subsidiaries 100% owned subsidiary
----------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Qualified CFA CFC CFS Qualified
REIT CNL APF GP Corp Acquisition Acquisition Acquisition CNL APF LP REIT
Subsidiary Corp.(2) Corp.(2) Corp.(2) Corp. Subsidiary
----------------- ------------- ------------- ------------- ------------
20% General Partner 80% Limited Partner
---------------------------
CNL APF Partners, LP(1)(3)
---------------------------
Partnership
</TABLE>
(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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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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<PAGE>
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 us and APF in connection with the proposed Acquisition of the
Income Funds. The plaintiffs are alleging that we breached our fiduciary duties
and violated 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. We
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 us and APF alleging
that we breached our fiduciary duties and that APF aided and abetted our breach
of fiduciary duties in connection with the Acquisition. The plaintiff is
seeking unspecified damages and equitable relief. We and the management of APF
believe that the lawsuit is without merit and intend to defend vigorously
against such claims. 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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<PAGE>
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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<PAGE>
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.
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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 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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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 Acquisition, APF anticipates further
increasing its line of credit to fund future growth. APF's unsecured revolving
loan facility will be used as a warehousing line until a sufficiently large
volume of investments is accumulated to warrant the issuance of equity
securities or additional unsecured or secured financing.
Assuming the Acquisition is completed in the fourth quarter of 1999, APF
anticipates a public offering of APF Shares either contemporaneously with or
shortly after completing the Acquisition. Management is unable to estimate the
size or exact timing of that offering but estimates it to be in the range of
$200 million to $300 million. In addition, 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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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 as described on page 132, 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, (407) 650-1000.
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Business Objectives and Strategies
APF seeks to enhance its financial position and increase results of
operations by pursuing the following business objectives and strategies:
. Providing a full range of real estate development and financing services
to operators of national and regional restaurant chains. APF is
structured as a "one-stop shop" for real estate services and financial
products that allows the operators of national and regional restaurant
chains to concentrate on their core business of operating restaurants.
APF provides operators of national and regional restaurant chains with a
variety of financing options such as triple-net leasing, mortgage
financing and secured equipment financing. APF also provides restaurant
property development services such as site selection, due diligence,
construction management and build-to-suit development to operators of
national and regional restaurant chains. APF seeks to be perceived by
operators of national and regional restaurant chains as their long-term,
strategic partner by providing all of their real estate financing and
development needs. APF also has a strategic alliance in the form of a
ten-year contractual agreement with CNL Advisory Services, Inc., an
affiliate of CNL Group, Inc. Pursuant to the contract, APF has the right
of first refusal to provide financing for restaurant properties where CNL
Advisory Services has been retained to provide financial advisory
services to a restaurant property purchaser. Along with its triple net
lease financing, mortgage financing and its build-to-suit development
functions, APF believes this alliance provides APF with enhanced
financing opportunities. The agreement also provides that CNL Advisory
Services will use its best efforts to ensure that APF is given the
opportunity to compete for financing of restaurant acquisitions where CNL
Advisory Services is engaged to provide financial advisory services to a
restaurant property seller. In addition, CNL Advisory Services is
required to pay APF an origination fee equal to 10% of all fees it
receives in conjunction with any restaurant advisory engagement.
. Focusing on strong, recognized brand name operators of national and
regional restaurant chains. APF believes that one of the reasons for its
success has been its focus on servicing operators of national and
regional restaurant chains. 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 provides 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
are generally leased on a long-term basis, generally 15 to 20 years, and
are structured as triple-net leases through which the tenant bears
responsibility for substantially all property costs and expenses
associated with ongoing maintenance and operation, including utilities,
property taxes, insurance and roof and structural repairs. Further, APF
acquires restaurant properties that are subject to an existing lease
which reduces the risks inherent in initial leasing. These factors
combine to yield stable cash flows for APF's restaurant property
investments.
APF's mortgage loans are similarly structured to provide consistent
returns. The mortgage loans are normally structured with a 15 to 20 year
base term and bear interest at a targeted premium over the prevailing
treasury bond rate. The mortgage loans contain strict operating
covenants, including a
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<PAGE>
requirement to maintain a fixed charge coverage ratio of 1.20 and a
prohibition on the borrower to own an interest in or operate any other
restaurant in the same chain within a three-mile radius of the property,
and are fully amortizing. In addition, the borrower may not amend their
organizational documents or any management agreement of the property
without prior written consent of APF. The fixed charge coverage ratio is
calculated by adding EBITDA and the rent obligation, and dividing that
total by the debt service plus the rent obligation. Therefore, in order
to have a fixed charge coverage ratio of 1.20, a borrower must have $1.20
in EBITDA plus the rent obligation, for every $1.00 of debt service plus
the rent obligation. A borrower's failure to meet its fixed charge
coverage ratio is a technical, but not a payment default. If such failure
occurs, APF may determine whether or not to place the borrower in default
and pursue remedies provided in the mortgage loan agreement. APF will
often modify the frequency with which the borrower is monitored, or
adjust the covenants in the loan, rather than declare the borrower to be
in default.
. Maintaining high-quality acquisition and development pipelines. As a one-
stop shop for operators of national and regional restaurant chains, APF
is able to tailor its services, ranging from turn-key, build-to-suit
development to mortgage financing, to provide exactly the real estate
services that its clients need. This range of services has allowed APF to
develop strategic relationships with operators of national and regional
restaurant chains that, in turn, lead to a steady pipeline of restaurant
property acquisitions and development opportunities. This pipeline is
further enhanced by APF's strategic alliance with CNL Advisory Services.
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. APF performs extensive due
diligence before investing in a restaurant property and applies strict
conservative underwriting criteria to all potential acquisitions and
financings. APF evaluates factors such as restaurant-level profitability,
restaurant chain operator experience, the position of the restaurant
chain in the industry overall, local market conditions, fixed charge
coverage ratios, underlying property value, physical condition of the
restaurant property and environmental considerations. APF also evaluates
the financial strength of the tenant, borrower, if different from the
tenant, and, if applicable, guarantor to assess the availability of
alternate sources of payment in the event that a tenant or borrower
defaults on its obligations to APF. APF's investments generally have full
tenant or borrower recourse, and many of APF's leases and mortgage loans
also have terms that give APF recourse to guarantors who are owners or
affiliates of the tenant or borrower.
. Maintaining diversification. As of 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.
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<PAGE>
Investment Type Diversification. APF further diversifies its risk
profile by offering a variety of financial services to its operators of
national and regional restaurant chains including triple-net lease
financing, mortgage financing and secured equipment financing.
. Managing and Monitoring Investments. APF, through its asset management
group, actively manages its restaurant property portfolio and administers
its investments. APF monitors property level issues including restaurant
sales, real estate taxes, assessments and insurance payments and actively
analyzes diversification, reviews tenant/borrower financial statements
and restructures investments in the case of underperforming and non-
performing investments. APF believes that the active management of its
investments is responsible, in large part, for the high tenant occupancy
rate for the restaurant properties. As of 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 a 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. APF believes that its large capitalization will permit it to obtain
capital from numerous sources at competitive rates.
. Variety of Financing Options. Because APF has a modest amount of
leverage, APF is in a favorable position to borrow funds at competitive
rates to expand its portfolio while maintaining a conservative capital
structure. APF's ability to borrow and to securitize its mortgage loans
enables it to continue to acquire additional restaurant properties
without the necessity of accessing the equity capital markets by selling
additional capital stock and exposing current stockholders to potential
dilution. Also, APF's UPREIT structure with the Operating Partnership
provides it with additional potential access to capital through the sale
of the Operating Partnership's units.
. Established Relationships with Clients. Through its acquisition of the
CNL Restaurant Businesses, APF has enhanced its strong tenant
relationships and contacts with potential future tenants and mortgage
loan recipients. APF's management believes that its long-standing
relationships with its clients gives APF the opportunity to provide
additional restaurant property services and financial products to such
clients for their future business needs.
. Broad Array Of Products and Services. Established in-house acquisition,
development and financing capabilities provide APF with a competitive
advantage over most other triple-net lessors and traditional real estate
lenders that typically provide more limited scope of services to their
prospective restaurant clients. APF believes that its ability to provide
operators of national and regional restaurant chains with a variety of
financing alternatives, site-selection and development services, as well
as providing merger and acquisition advisory services through CNL
Advisory Services, provides APF with a competitive advantage in the
restaurant finance business.
. Experienced Management. APF has developed a senior management team with
an average of more than 17 years of experience in developing and
operating restaurant properties and in the real estate and financial
services industry. APF believes that its management has a specialized
ability to invest in and manage restaurant real estate that will decrease
investment risk and enhance stockholders' returns.
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<PAGE>
APF'S Recent Expansion of Services
As a result of the acquisition of the CNL Restaurant Businesses, APF now
provides the following comprehensive restaurant property service functions to
operators of national and regional restaurant chains:
. Restaurant Acquisition, Development and Management Services. In its
acquisition of the CNL Restaurant Businesses, APF acquired complete
acquisition, development and in-house asset management functions by
acquiring the Advisor. Because APF had no employees, the Advisor provided
these functions on behalf of APF. APF now has responsibility for its day-
to-day operations, including raising capital, investment analysis,
acquisitions, due diligence, asset management, loan servicing and
accounting services. APF also provides restaurant development services
including site selection, construction management and build-to-suit
development. As of March 31, 1999, APF was managing approximately 75
restaurant development projects. Having the ability to provide these
service functions internally, eliminates APF's obligation to pay fees to
the Advisor and any perceived conflicts of interest that may arise from
APF's transactions with the Advisor. We also believe that in-house
acquisition, financing and development capability enhance APF's
performance through increased control over functions that are important
to the growth of its business.
Investment analysts specializing in REITs in recent years have emphasized
their strong preference for internally-advised REITs. These analysts
suggest that the nature of the relationship between externally-advised
REITs and their external advisors is susceptible to conflicts of
interest, most of which can be avoided through self-administration. Of
the 45 REITs that are traded on the NYSE and have an equity market
capitalization of more than $1 billion, approximately 88% are internally-
advised. Accordingly, we believe that investors and analysts will view
APF's new, internally-advised structure more favorably.
Historically, APF did not have a large enough asset base to provide the
economies of scale needed to support efficiently the extensive general
and administrative expenses of an in-house management team. APF's
management believed that the efficiencies experienced by employing a
third-party advisor would diminish as APF grew and expected that as APF
grew it would be more cost effective to become internally-advised. APF
believes that APF's asset base has grown sufficiently large to now
support such an infrastructure efficiently.
. Restaurant Financial Services. APF provides comprehensive financing
options including real estate sale-leaseback financing, mortgage
financing, construction financing and equipment financing to the
restaurant industry. APF expanded its financing capabilities by acquiring
the CNL Restaurant Financial Services Group, which made and serviced
mortgage loans to operators of national and regional restaurant chains
comparable to the operators of national and regional restaurant chains
that currently are tenants of APF. In addition, the CNL Restaurant
Financial Services Group "securitized" mortgage loans. A mortgage loan
securitization involves combining a group of mortgage loans into a pool,
creating securities that are backed by the combined pool and then issuing
those securities to investors. The CNL Restaurant Financial Services
Group made loans and securitized them by selling them to a special
purpose entity which is organized solely for the purpose of issuing
certificates representing beneficial interests in the pool of mortgage
loans. The CNL Restaurant Financial Services Group received from its
securitization (1) the net 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 were
securitized. Additionally, the CNL Restaurant Financial Services Group
generally retained a subordinated interest in the mortgage loans, which
because it is subordinated, generally bears interest at a higher rate
than the mortgage loans as a whole. APF expects to continue these
business practices. The acquisition of the CNL Restaurant Financial
Services Group has provided a platform for the expansion of APF's
existing financing capabilities to include such securitization
transactions, which APF believes enables it to access more financing
opportunities and, ultimately, to increase cash available to be
distributed to its stockholders. APF believes securitization transactions
may permit it to obtain
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<PAGE>
additional capital with greater ease and at a lower cost at times when
market conditions are not suitable for raising funds on economically
attractive terms through the issuance of APF's equity or debt securities.
APF estimates that a hypothetical one percentage point increase or
decrease in long-term interest rates at December 31, 1998 would have
impacted the mortgage loans and securitized mortgage interest that it
holds and result in a change to net income of approximately 13%. This
sensitivity analysis contains certain simplifying assumptions (for
example, it does not consider the impact of prepayment risk or credit
spread risk). Therefore, although it gives an indication of APF's
exposure to interest rate changes at December 31, 1998, it is not
intended to predict future results and APF's actual results will likely
vary.
In addition to enhancing APF's expertise in providing mortgage loans and
establishing a platform from which to engage in securitization
transactions, APF also acquired an existing mortgage loan portfolio,
including the servicing rights of such portfolio and assumed the
warehouse lines of credit of the CNL Restaurant Financial Services Group.
As of 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 to originate an
additional $123 million in mortgage loans.
As consideration in its acquisition of the CNL Restaurant Businesses, APF
paid 6.15 million APF Shares valued at the exchange value. Merrill Lynch has
provided to APF an opinion that the aggregate consideration paid by APF for
the CNL Restaurant Businesses was fair to APF from a financial point of view.
APF also has entered into a strategic alliance with CNL Advisory Services,
a wholly-owned subsidiary of CNL Group, Inc., which advises operators of
national and regional restaurant chains on the merger and acquisition of
restaurant businesses. Under the terms of the agreement, APF has the right of
first refusal to provide financing for restaurant properties in connection
with any merger or acquisition with respect to which CNL Advisory Services is
providing advisory services. APF did not attempt to acquire CNL Advisory
Services because the income generated by this company does not qualify under
the gross income tests for a REIT for tax purposes. APF's management believes,
however, that its agreement with CNL Advisory Services will generate
additional financing opportunities for APF and further enhance its
relationships with operators of national and regional restaurant chains.
Because of APF's ability to offer a full range of financing opportunities
to operators of national and regional restaurant chains, APF believes that the
pool of targeted restaurant chain operators to which APF markets its financial
products will increase. In addition, APF will be able to compete more
effectively with other restaurant chain finance companies because of its
ability to offer a full range of financial products and services to a
restaurant chain operator.
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<PAGE>
The Restaurant Properties
General
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>
Total Number of Average Age Percent of
Restaurant of Building Annualized Total Total Rental
Restaurant Chain Properties (years) Rental Revenue(1) Revenue
- ---------------- --------------- ----------- ----------------- ------------
<S> <C> <C> <C> <C>
Golden Corral........... 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 Restau-
rant................... 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.
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<PAGE>
The following table provides the same material restaurant property
information by tenant with respect to the restaurant properties owned on a
triple-net basis by APF as of March 31, 1999.
<TABLE>
<CAPTION>
Average
Total Number of Age of Percent of
Restaurant Buildings Total Total Rental
Tenant Properties (years) Revenue Revenue
------ --------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
S&A Properties
Corporation............... 38 19.1 $ 7,064,000 13.3%
Foodmaker, Inc. ........... 53 1.6 5,010,000 9.4%
Golden Corral Corporation.. 33 1.7 4,193,000 7.9%
IHOP Corporation........... 28 2.1 3,695,000 6.9%
Houlihan's Restaurants,
Inc. ..................... 20 19.4 3,291,000 6.2%
Pollo Operations, Inc. .... 13 4.8 2,027,000 3.8%
Woodland Group, Inc. ...... 10 4.4 1,607,000 3.0%
Chevy's, Inc. ............. 6 4.8 1,514,000 2.8%
DenAmerica Corporation..... 21 6.1 1,363,000 2.6%
The Ground Round, Inc. .... 12 18.3 1,341,000 2.5%
Burger King Corporation.... 14 18.1 1,311,000 2.5%
Boston Chicken, Inc. ...... 10 2.3 1,307,000 2.5%
TW-Tennessee, L.L.C. ...... 7 8.9 1,139,000 2.1%
Other ..................... 248 7.3 18,353,000 34.5%
--- ----------- -----
Total...................... 513 $53,215,000 100.0%
=== =========== =====
</TABLE>
As of March 31, 1999, APF leased on a triple-net basis 513 restaurant
properties in 40 states and substantially all of the restaurant properties were
being leased. All nonperforming restaurant properties owned by APF are actively
being remarketed for either re-lease or sale. Upon completion of the
Acquisition and assuming that APF had acquired all of the Income Funds as of
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, 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 1,100 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>
The following table sets forth certain information regarding the geographic
diversification of APF's real estate investments, including mortgage financings
and securitizations, by geographic region 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>
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<PAGE>
The following table provides a breakdown, by state, of the number of
restaurant properties in which APF had an interest, including mortgage
financings and securitizations as of March 31, 1999.
<TABLE>
<CAPTION>
Total Number of
State Restaurant Properties
- ----- ---------------------
<S> <C>
Alabama................................................... 38
Arizona................................................... 27
California................................................ 55
Colorado.................................................. 22
Connecticut............................................... 6
Delaware.................................................. 2
District of Columbia...................................... 1
Florida................................................... 124
Georgia................................................... 38
Idaho..................................................... 2
Iowa...................................................... 7
Illinois.................................................. 17
Indiana................................................... 6
Kansas.................................................... 11
Kentucky.................................................. 12
Louisiana................................................. 3
Maine..................................................... 1
Maryland.................................................. 24
Massachusetts............................................. 5
Michigan.................................................. 17
Minnesota................................................. 16
Mississippi............................................... 9
Missouri.................................................. 46
Nebraska.................................................. 4
Nevada.................................................... 5
New Hampshire............................................. 1
New Jersey................................................ 48
New Mexico................................................ 5
New York.................................................. 31
North Carolina............................................ 19
North Dakota.............................................. 2
Ohio...................................................... 81
Oklahoma.................................................. 11
Oregon.................................................... 16
Pennsylvania.............................................. 68
Rhode Island.............................................. 1
South Carolina............................................ 14
South Dakota.............................................. 1
Tennessee................................................. 83
Texas..................................................... 87
Utah...................................................... 5
Virginia.................................................. 64
Washington................................................ 16
Wisconsin................................................. 38
West Virginia............................................. 24
-----
1,113
=====
</TABLE>
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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.
APF evaluates each of its investment opportunities through the following
departments:
. Acquisitions. This department is responsible for originating new
investments with, and maintaining relationships within, the restaurant
chain industry. Through March 31, 1999 and assuming the acquisition of
the CNL Restaurant Businesses, this group originated, for APF or other
affiliates, a total of $1.9 billion in triple net-leases and mortgage
loans in the restaurant chain industry. In analyzing potential restaurant
property acquisitions and investments, APF carefully underwrites each
aspect of the transaction, including the tenant or borrower, the real
estate and the lease or mortgage loan, to satisfy the acquisition
criteria and enhance the value of returns as described below.
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. APF seeks 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, APF attempts to
include provisions in its 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 its conservative underwriting has led to its historically
low default and loss experience.
APF's investment committee, which is comprised of senior management,
functions as a separate and final step in the investment approval
process. As part of the underwriting process, APF's investment committee
independently evaluates each investment opportunity. As a transaction is
structured, it is evaluated for its expected financial returns,
creditworthiness of the tenant, the real estate characteristics,
guarantors or other collateral, and the lease or mortgage loan terms. As
one of the industry leaders in triple-net lease financing and mortgage
loan origination, APF has proven systems in place to enable it to
effectively underwrite tenant or borrower financings.
. Development Services. This group provides a full range of real estate
development services, including market evaluation, site selection, due
diligence, construction management and turn-key, build-to-suit
development. The development services group provides APF with a pipeline
of restaurant property
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financing transactions by overseeing the initial development of sites for
the client and establishing a relationship with the client at the start of
its use of the restaurant property.
. Asset Management. This group is comprised of restaurant property real
estate and servicing specialists who monitor and manage the portfolio of
real estate and the real estate financings as well as any secured
equipment financing. The asset management group seeks to optimize the
performance of the current portfolio of restaurant properties through
timely dispositions and favorable lease modifications. It also monitors
payment receipts, property tax and insurance compliance, administers
underperforming and non-performing investments and oversees dispositions
and tenant substitutions. The asset management group is also responsible
for performing due diligence in advance of purchasing restaurant
properties, interfacing with legal counsel and other third-party service
providers, and tracking the performance of tenants and restaurant
concepts to identify potential concerns in advance of default.
. Finance/Treasury. This group is responsible for securitizing APF's
mortgage loan portfolios in the capital markets and ensuring that APF has
adequate capital sources and lending capacity to continue to develop
APF's triple-net lease and mortgage loan business. Additionally, this
group is responsible for SEC compliance and financial and tax reporting.
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>
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<PAGE>
- --------
(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 payable in 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's management expects APF will be able
to pay these expenses through retained cash from operations or borrowings.
Lease provisions relating to casualty loss and condemnation vary among APF's
leases. The leases on restaurant properties generally obligate the tenant to
repair and restore the restaurant property or to substitute another restaurant
property for the damaged or condemned restaurant property. Under the leases of
the remaining restaurant properties, APF generally is required to repair or
restore a restaurant property in the event of casualty loss or condemnation,
although it is entitled to casualty insurance proceeds, including proceeds, if
any, for loss of rent, or condemnation proceeds in such circumstances. To the
extent that the tenant may abate its rent payments pending the repair or
restoration of a restaurant property and such abatement is not offset by
insurance proceeds, APF's rental income may be adversely affected. In a number
of APF's leases, the tenant may terminate its lease upon casualty or
condemnation. In substantially all of these leases, the tenant's right to
terminate the lease is conditioned on one or more of the following factors: (1)
the damage or the taking being of a material nature; (2) the damage or taking
occurring within the last few years of the lease term and the tenant not
exercising its option to extend the lease; or (3) the period of time necessary
to repair the premises exceeding a specified number of months.
A substantial number of APF's leases include purchase options in favor of
the tenant, generally at no less than fair market value, or a right of first
refusal if APF should seek to sell a restaurant property. Under certain
circumstances, a tenant generally may assign its lease or sublet the property
without APF's approval, although the tenant typically remains liable under the
lease and the guarantor, if any, typically remains liable under its guaranty
subsequent to assignment or sublease. Under certain of the leases, the tenant
has a right, under specified circumstances, to substitute a comparable property
for a property leased from APF.
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<PAGE>
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.
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 Businesses, including
the restaurant chain, the number of restaurant properties subject to mortgage
loans per restaurant chain, the aggregate interest income per restaurant chain
and the outstanding balance of mortgage loans per restaurant chain.
<TABLE>
<CAPTION>
Total
Number of Annualized Percent of Total Percent of
Restaurant Interest Interest Outstanding Outstanding
Restaurant Chain Properties Income Income Balance Balance
- ---------------- ---------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Applebee's.......... 61 $5,932,000 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's....... 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 material information regarding mortgage loans made
by APF on restaurant properties by obligor as of March 31, 1999.
<TABLE>
<CAPTION>
Total Percent of
Number of Annualized Total Total Percent of
Restaurant Interest Interest Outstanding Outstanding
Obligor Properties Income Income Balance Balance
- ------- ---------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Wisconsin Hospitality
Group.................. 19 $ 2,594,000 11.0% $ 31,823,000 11.9%
Castle Hill Holdings.... 46 1,743,000 7.4 16,321,000 6.1
Briad Restaurant Group,
LLC.................... 7 1,477,000 6.3 18,340,000 6.9
Quality Restaurant
Concepts, LLC.......... 12 1,418,000 6.0 16,924,000 6.4
Burger Busters IV, LLC.. 15 1,109,000 4.7 11,357,000 4.3
The Westwind Group,
Inc.................... 11 1,074,000 4.6 11,776,000 4.4
WCM Oregon, LLC......... 6 796,000 3.4 10,205,000 3.8
Cypress Restaurants..... 7 771,000 3.3 8,457,000 3.2
Burger Busters VIII,
LLC.................... 6 717,000 3.1 7,603,000 2.9
Other................... 183 11,778,000 50.2 133,292,000 50.1
--- ----------- ----- ------------ -----
Total................. 312 $23,477,000 100.0% $266,098,000 100.0%
=== =========== ===== ============ =====
</TABLE>
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 Businesses, information by restaurant chain for mortgage loans that
APF has securitized.
<TABLE>
<CAPTION>
Total
Number of Total Percent of
Restaurant Outstanding Outstanding
Restaurant Chain Properties Balance Balance
- ---------------- ---------- ------------ -----------
<S> <C> <C> <C>
T.G.I. Friday's............................ 35 $ 53,113,000 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>
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<PAGE>
The following table shows information by obligor for mortgage loans that APF
has securitized, as of March 31, 1999.
<TABLE>
<CAPTION>
Number Percent of
of Restaurant Total Outstanding
Obligor Properties Outstanding Balance Balance
- ------- ------------- ------------------- -----------
<S> <C> <C> <C>
S & A Restaurant Corporation.... 28 $ 44,685,000 17.0%
Valenti Management, Inc. ....... 31 29,089,000 11.1
El Rancho NY Foods, Inc. ....... 38 20,660,000 7.9
Mainstreet & Main, Inc. ........ 16 19,926,000 7.6
Old Dominion, Inc. ............. 19 18,464,000 7.0
Judy Fenwick Corporation........ 14 10,686,000 4.1
Briad Restaurant Group, LLC..... 4 9,877,000 3.7
S. Wisconsin Foods, LLC......... 12 9,871,000 3.7
RT Denver Franchise, LP......... 6 9,373,000 3.6
Bistate Bistro.................. 6 9,160,000 3.5
Nailen Properties/GGG, LLP & GGG
Foods, Inc. ................... 10 8,286,000 3.1
Other........................... 104 72,767,000 27.7
--- ------------ -----
Total......................... 288 $262,844,000 100.0%
=== ============ =====
</TABLE>
Build to Suit Development. APF also provides build-to-suit construction
services, including market analysis, site selection, contract negotiation,
permitting and construction. APF can provide all or a selected portion of these
services to operators of national and regional restaurant chains.
APF will review the appropriate trade areas in the markets identified by
each restaurant operator, and, by analyzing demographics, site criteria, costs
and traffic patterns, APF will determine the best potential target areas for
developing its client's restaurants. After consulting with its clients, APF
will then negotiate the real estate contract or lease agreement, as
appropriate. As part of its site acquisition/development services, APF will
perform preliminary due diligence on the restaurant property. APF will
coordinate all necessary architectural and engineering services related to the
restaurant property and will prepare preliminary and final construction
budgets. As the project progresses into the construction phase, APF will pre-
qualify various general contractors prior to issuing an invitation to bid and
will then select the general contractor from the bidding process, provide cost
comparisons among bidders and select the general contractor with approval of
client.
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.
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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 volume, which is APF's target market,
increased from $10.8 billion in 1995 to $11.7 billion in 1996 to $13.1 billion
in 1997. The number of restaurant properties for the same top franchisees
increased from 12,325 in 1995 to 12,846 in 1996 and to 14,170 in 1997,
reflecting a growth rate of 10.3% compared with 1996.
As the restaurant chain industry has matured, APF has seen a trend toward
consolidation which offers opportunities for APF to provide its restaurant
property service and financing to leading franchisors which are accounting for
the majority of the growth in the industry. During the past decade, restaurant
chains have increased market position in comparison to independent restaurant
companies by achieving economies of scale and by developing strong brand
equity. Much of the chains' market share gains in the past came at the expense
of small, independent operators, who tended to be less sophisticated and less
focused on new restaurant development. The top chains may face greater chain-
versus-chain competition, however, rather than chain-versus-independent
competition. APF's target market remains national and regional franchisors and
franchisees within the top 200 restaurant operating companies. The top 100
restaurant chains increased their share of restaurant units from 25% in 1980 to
32% of current U.S. units, and their revenues have increased in the same period
from 40% to 48% of total current domestic revenues.
Growth in the fast-food, family-dining and casual-dining sectors of the
restaurant industry are expected to remain strong for several reasons, but
primarily because the income of households continues to rise through the
maturation of the baby boomers as well as the number of women working outside
the home. Today's dual income lifestyle in American families continues to be
the norm. Consequently, the need for convenience food outside the home
continues to grow.
Environmental Matters
APF will undertake a third-party Phase I investigation of potential
environmental risks when evaluating an acquisition. A "Phase I investigation"
is an investigation for the presence or likely presence of hazardous substances
or petroleum products under conditions which indicate an existing release, a
post release or a material threat of a release. A Phase I investigation does
not typically include any sampling. Where warranted, further assessments are
performed by third-party environmental consulting and engineering firms. APF
may acquire a restaurant property with environmental contamination, subject to
a determination of the level of risk and potential cost of remediation. APF
generally will require restaurant property tenants to fully indemnify it
against any environmental problem or condition existing as of the date of
purchase and will obtain environmental insurance for any contaminations on
restaurant properties. In some instances, APF will be the assignee of or
successor to the buyer's indemnification rights. Additionally, APF will
generally structure its leases to require the tenant to assume all
responsibility for environmental compliance or environmental remediation and to
provide that non-compliance with environmental laws be deemed a lease default.
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<PAGE>
Insurance
Under their leases, APF's tenants are generally responsible for providing
adequate insurance on the restaurant properties. APF believes the restaurant
properties are covered by adequate fire, flood, liability and property
insurance provided by reputable companies. Some of the restaurant properties,
however, are not 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.
APF itself will compete with other persons and entities both to locate
suitable restaurant properties for acquisition and to locate purchasers for its
restaurant properties. APF also will compete with other financing sources such
as banks, mortgage lenders, and sale/leaseback companies for suitable
restaurant properties, tenants, mortgage loan borrowers and equipment tenants.
Because of APF's ability to offer complete "turn-key," build-to-suit
development services, from site selection to construction management, together
with its ability to provide clients with financing options, such as triple-net
leasing, mortgage loans and secured equipment financing, APF believes that it
will be a preferred provider for all the real estate related business needs of
operators of national and regional restaurant chains. Specifically, in contrast
to its competitors, APF has positioned itself in the restaurant industry as a
provider of a complete range of restaurant financing options and development
services. In addition, APF believes that it will be able to finance its growth
from numerous sources at competitive rates. APF believes that its principal
competitors include U.S. Restaurant Properties, Inc., Franchise Finance
Corporation of America, Inc. and Realty Income Corporation.
Regulation of Mortgage Loans and Equipment Leases
The mortgage loans and secured equipment leases may be subject to regulation
by federal, state and local authorities and subject to various laws and
judicial and administrative decisions imposing various requirements and
restrictions, including:
. regulating credit granting activities,
. establishing maximum interest rates and finance charges,
. requiring disclosures to customers,
. governing secured transactions, and
. setting collection, repossession, claims handling procedures and other
trade practices.
In addition, certain states may have enacted legislation requiring the
licensing of mortgage bankers or other lenders, and these requirements may
affect APF's ability to effectuate its mortgage loans and secured equipment
leases. Whether APF can operate in these or other jurisdictions may be
dependent upon a finding by the appropriate authority in the jurisdiction of
financial responsibility, character and fitness of APF. APF may determine not
to make mortgage loans or enter into secured equipment leases in any
jurisdiction in which it believes APF has not complied in all material respects
with applicable requirements.
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Franchise Regulation
Many states regulate the franchise or license relationship between a
tenant/franchisee and a restaurant chain. APF will not be an affiliate of any
restaurant chain, and is not currently aware of any states in which the
relationship between APF as lessor and the tenant will be subjected to those
regulations, but it will comply with such regulations in the future, if
required. Additionally, restaurant chains which franchise their operations are
subject to regulation by the Federal Trade Commission.
Employees
APF employs 135 individuals, none of which are covered by collective
bargaining agreements. 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 us 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 we breached our 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 we breached our
fiduciary duties and that APF aided and abetted our breach of fiduciary duties
in connection with the Acquisition. The plaintiff is seeking unspecified
damages. In addition, the plaintiff is seeking equitable relief that would
enjoin the proposed Acquisition.
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<PAGE>
BUSINESS OF THE INCOME FUNDS
The following discussion describes the current business of the Income Funds,
the methods by which the Income Funds' evaluate and acquire the restaurant
properties and the terms upon which the Income Funds' restaurant properties are
leased. As of 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 that we selected. Restaurant properties
purchased by the Income Funds are leased under arrangements requiring base
annual rent equal to a specified percentage of the Income Funds' cost of
purchasing a particular restaurant property, generally with contractual rent
increases, as well as additional "percentage rent" based on gross sales of the
restaurant chain leasing the restaurant property. See "--Description of
Leases--Computation of Lease Payments."
We have structured the Income Funds' investments to allow them to
participate, to the maximum extent possible, in any sales growth in these
restaurant industry segments, as reflected in the restaurant properties and
certain provisions of the leases held by the Income Funds. For instance, the
Income Funds generally structure their leases with percentage rent requirements
based on gross sales of the particular restaurant. Gross sales may increase
even absent real growth because increases in the restaurant's costs are passed
on to the consumers through increased prices, and increased prices are
reflected in gross sales. Also, to provide regular cash flow to the Income
Funds, the Income Funds' leases provide that a minimum level of rent is payable
regardless of the amount of gross sales at a particular restaurant property.
The Income Funds have also endeavored to maximize growth and minimize risks
associated with ownership and leasing of real estate that operates in these
restaurant industry segments through several methods:
. careful selection and screening of their lessees in order to reduce risks
of tenant default;
. monitoring statistics relating to restaurant chains and continuing to
develop relationships in the industry; and
. acquisition of restaurant properties for all cash, with no debt or liens
relating to the restaurant properties.
For a description of the standards which we 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, we have strategically
acquired restaurant properties to diversify among restaurant chains and the
geographic location of the restaurant properties, and the restaurant properties
acquired by the Income Funds are located throughout the United States. While
the Income Funds may acquire restaurant properties in both fee and by
leasehold, the Income Funds mostly hold restaurant properties in fee.
We believe that freestanding, triple-net leased restaurant properties of the
type in which the Income Funds have invested are attractive to tenants because
freestanding properties typically offer high visibility to passing traffic,
ease of access from a busy thoroughfare, tenant control over the site to set
hours of operation and maintenance standards and distinctive building designs
conducive to customer name recognition.
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Management Services
Upon APF's acquisition of the Advisor, APF assumed the obligations of the
Advisor to provide management services relating to the Income Funds and their
restaurant properties pursuant to the terms of the management agreement that is
currently in place between each Income Fund and the Advisor. In this section,
we will describe the services historically provided to the Income Funds as
being provided by the Advisor.
The Advisor is responsible for assisting the Income Funds in acquiring
restaurant properties, negotiating leases, collecting rental payments,
inspecting the restaurant properties and the tenants' books and records, and
responding to tenant inquiries and notices. The Advisor also provides
information to each Income Fund about the status of the leases and the
restaurant properties. In exchange for these services, the Advisor is entitled
to receive a management fee from each Income Fund which, generally, is an
annual fee equal to the following:
. for CNL Income Fund, Ltd through CNL Income Fund III, Ltd. .50% of the
value of total assets under management valued at cost, or 1% of the sum
of gross rental revenues derived from the restaurant properties, if that
amount is less, and
. for CNL Income Funds IV, Ltd. through XVI, Ltd., 1% of the sum of gross
rental revenues, excluding noncash lease accounting adjustments, that the
Income Fund derives from the restaurant properties.
The management fee generally is payable monthly. Under 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 some instances, the Advisor
negotiates an assignment of an existing lease if we, based on the
recommendation of the Advisor, determine that the terms of an acquisition and
lease of a restaurant property, taken as a whole, are favorable to the Income
Fund. In such cases, the terms of the lease may vary substantially from the
Income Funds' standard lease terms. Generally, the leases are structured to be
long-term "triple-net" lease agreements, which provide for monthly rental
payments plus a percentage of gross sales, which will increase the value of the
land and buildings and provide an inflation hedge. 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 property in the event an offer is received from a third party to
purchase the restaurant property. Certain leases
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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 by us is based on an evaluation of several factors:
. the operations of restaurants in the restaurant chain;
. the number of restaurants operated throughout the restaurant chain's
system;
. the relationship of average restaurant gross sales to the average capital
costs of a restaurant; and
. the restaurant chain's relative competitive position among the same type
of restaurants offering similar types of food, name recognition, and
market penetration.
None of the restaurant chains is affiliated with us, the Advisor, or the
Income Funds.
Selection of Restaurant Properties and Lessees. In making investments in
restaurant properties, we and the Advisor consider relevant real property and
financial factors, including:
. the condition, use, and location of the restaurant property;
. the income-producing capacity of the restaurant properties;
. the prospects for long-term appreciation;
. the relative success of the restaurant chain in the geographic area in
which the restaurant property is located; and
. the management capability and financial condition of the lessee.
In selecting lessees, we and the Advisor have historically considered the
prior experience of the lessee in the restaurant industry, the net worth of the
lessee, past operating results of other restaurants currently or previously
operated by the lessee, and the lessee's prior experience in managing
restaurants within a particular restaurant chain.
In selecting specific restaurant properties within a particular restaurant
chain and in selecting lessees for each Income Fund's restaurant properties,
the Advisor applies the following minimum criteria.
. Each restaurant property was located in what we believed to be a prime
business location.
. Base or minimum annual rent provided a specified minimum return on the
Income Fund's cost of purchasing and, if applicable, developing the
restaurant property, and the lease typically also will provide for
automatic increases in base rent at specified times during the lease term
and/or for payment of percentage rent based on gross sales.
. The initial lease term typically was at least 15 to 20 years.
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. In evaluating prospective tenants, the Advisor examined, among other
factors, the lessee's ranking in its market segment, trends in sales in
each restaurant chain, overall changes in consumer preferences, and the
lessee's ability to adapt to changes in market and competitive
conditions, the lessee's historical financial performance, and its
current financial condition.
In general, an Income Fund will not invest in a restaurant property, if, as
a result, more than 25% of its gross proceeds from its offering of units would
be invested in restaurant properties of a single restaurant chain or if more
than 30% of its gross proceeds would be invested in restaurant properties in a
single state.
Description of Restaurant Properties
General. As of 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
Income Funds' restaurant properties owned as of March 31, 1999.
<TABLE>
<CAPTION>
Number of
States in
Total which Average Percent
Number of Restaurant Age of Total of Total
Restaurant Properties Buildings Rental Rental
Income Fund Properties(1) are Located (years) Revenue Revenue
- ----------- ------------- ----------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
CNL Income Fund, Ltd.... 17 11 13.4 $1,052,000 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.
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The following tables present information on the restaurant properties owned
by the Income Funds both by restaurant chain and by tenant.
<TABLE>
<CAPTION>
Average
Total Age of Percent of
Number of Building Total Rental Total Rental
Restaurant Chain Properties (years) Revenue Revenue
- ---------------- ---------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Golden Corral................... 61 8.2 $ 8,181,000 16.9%
Burger King..................... 63 11.8 5,581,000 11.5
Denny's......................... 54 10.6 5,215,000 10.8
Jack in the Box................. 50 7.9 4,913,000 10.2
Hardee's........................ 64 7.3 4,429,000 9.1
Shoney's........................ 26 8.9 2,874,000 5.9
Long John Silver's.............. 42 7.7 2,362,000 4.9
Checkers........................ 47 5.1 2,069,000 4.3
Wendy's......................... 16 11.9 1,434,000 3.0
KFC............................. 17 10.6 1,185,000 2.4
IHOP............................ 8 4.0 1,139,000 2.3
Boston Market................... 13 3.3 1,067,000 2.2
Pizza Hut....................... 22 16.8 866,000 1.8
Popeyes......................... 16 14.4 826,000 1.7
Arby's.......................... 9 8.9 716,000 1.5
Chevy's Fresh Mex............... 2 4.5 461,000 1.0
Other........................... 64 10.3 5,030,000 10.5
--- ----------- ------
Total........................... 574 $48,348,000 100.00%
=== =========== ======
<CAPTION>
Average
Total Age of Percent of
Number of Building Total Rental Total Rental
Tenant Properties (years) Revenue Revenue
- ------ ---------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Golden Corral Corporation....... 58 8.1 $ 7,742,000 16.0%
Foodmaker, Inc. ................ 50 7.9 4,913,000 10.1
Flagstar Enterprises, Inc. ..... 52 7.0 3,675,000 7.6
DenAmerica Corporation.......... 33 11.1 3,474,000 7.2
Restaurant Management Services,
Inc. .......................... 31 11.8 2,334,000 4.8
Checkers Drive-In Restaurant,
Inc............................ 47 5.1 2,069,000 4.3
Burger King Corporation......... 22 11.5 2,014,000 4.2
Long John Silver's, Inc. ....... 20 6.2 1,732,000 3.6
Denny's, Inc. .................. 13 7.3 1,200,000 2.5
Carrols Corporation............. 13 14.4 1,041,000 2.1
IHOP Corporation................ 7 3.9 1,006,000 2.1
Other........................... 228 10.5 17,148,000 35.5
--- ----------- ------
Total........................... 574 $48,348,000 100.00%
=== =========== ======
</TABLE>
The tenants of two restaurant chains have filed voluntary petitions for
bankruptcy. In October 1988, tenants of nine Boston Market restaurant
properties filed voluntary petitions for bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code As of May 31, 1999 three of these restaurant properties
remain closed, and the Income Funds continue to receive lease payments on the
remaining six restaurant properties. The tenant of 36 Long John Silver's
restaurant properties filed voluntary petitions 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 the
Income Funds continue to receive lease payments on the remaining 26 restaurant
properties.
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Land. Lot sizes generally range from 9,000 to 467,000 square feet depending
upon building size and local demographic factors. Restaurants located on land
within shopping centers are freestanding and may be located on smaller parcels
if sufficient common parking is available. Restaurant properties purchased by
an Income Fund are in locations zoned for commercial use which were reviewed
for beneficial traffic patterns and volume of traffic. Generally, the cost to
the Income Funds of the underlying land ranged from $8,800 to $1,160,000,
although the cost of the land for particular restaurant properties may be
higher or lower in some cases.
Buildings. Either before or after construction or renovation, the restaurant
properties acquired by the Income Funds are one of a restaurant chain's
approved designs. Building and site preparation costs have varied depending
upon the size of the building and the site and the area in which the restaurant
property is located. Building and site preparation costs to the Income Funds
ranged from $96,000 to $1,160,000 for each restaurant property.
Generally, the restaurant properties acquired by the Income Funds consist of
both land and building, although in a number of cases the Income Fund may have
acquired only the land underlying the restaurant building with the building
owned by a tenant or a third party, 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 restaurant
properties, including utilities, property taxes and insurance.
The following table shows the distribution of restaurant properties of the
Income Funds by restaurant chain as of 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.
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<PAGE>
Description of Leases
Here, we have summarized the leases of the restaurant properties. The terms
and conditions of any lease, however, entered into by any of the Income Funds
with regard to a restaurant property may vary from those described below.
General. At March 31, 1999, all of the Income Funds' leases were triple-net
leases, which means that the lessees are required to pay all repairs,
maintenance, property taxes, and insurance. The lessees also are required to
pay for utilities and the cost of any renovations permitted under the leases.
An Income Fund is the lessor under the lease except in certain circumstances in
which it may be a party to a joint venture or co-tenancy arrangement which, in
turn, owns the restaurant property. In those cases, the joint venture, rather
than the Income Fund, is the lessor, and all references in this section to the
Income Fund as lessor therefore should be read accordingly. 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.
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Computation of Lease Payments. During the initial term of the lease, the
lessee pays the Income Fund, as lessor, minimum annual rent equal to a
specified percentage of the Income Fund's cost of purchasing the restaurant
property. Generally, the leases provide for the escalation of the minimum
annual rent at predetermined intervals during the term of the lease. In the
case of acquisition of restaurant properties that were to be constructed or
renovated pursuant to a development agreement, the Income Fund's costs of
purchasing the restaurant property included the purchase price of the land,
including all fees, costs, and expenses paid by the Income Fund in connection
with its purchase of the land, and all fees, costs, and expenses disbursed by
the Income Fund for construction of restaurant improvements.
In addition to minimum annual rent, in many cases, the lessee pays the
Income Fund "percentage rent." Percentage rent is computed as a percentage of
gross sales of the restaurant operating at a particular restaurant property.
The leases generally provide that percentage rent will commence in the first
lease year in which gross sales exceed a specified amount. Certain leases,
however, provide that percentage rent is to be paid quarterly beginning at the
end of the first two years of the lease and each succeeding quarter thereafter
to the extent the restaurant gross sales in that quarter exceed the average
quarterly gross sales during the first two lease years. Gross sales include
sales of all products and services of the restaurant, excluding sales taxes,
tips paid to serving people, and sales from vending machines.
Assignment and Sublease. In general, no lease may be assigned or subleased
without the Income Fund's prior written consent, which may not be unreasonably
withheld, except to a tenant's corporate franchiser, corporate affiliate or
subsidiary, a successor by merger or acquisition, or, in 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 in the lease, or, with the
Income Fund's prior written consent and at the lessee's own expense, to make
material structural modifications that may include demolishing and rebuilding
the restaurant. Under certain leases, the lessee, at its own expense, may make
any type of alterations to the leased premises without the Income Fund's
consent but must provide the Income Fund with plans of any proposed structural
modifications at least 30 days before construction of the alterations
commences. Certain leases may require the lessee to post a payment and
performance bond for any structural alterations with a cost in excess of a
certain amount.
Right of Lessee to Purchase. If the Income Fund wishes at any time to sell a
restaurant property pursuant to a bona fide offer from a third party, the
lessee of that restaurant property will generally have the right to purchase
the restaurant property for the same price, and on the same terms and
conditions, as contained in the offer. In certain cases, the lessee also has a
right to purchase the restaurant property seven to 20 years after commencement
of the lease at a purchase price equal to the greater of (1) the restaurant
property's appraised value at the time of the lessee's purchase, or (2) a
specified amount, generally equal to the Income Fund's purchase price of the
restaurant property, plus a predetermined percentage of such purchase price.
Alternatively, a limited number of leases provide for a purchase option price
which is computed pursuant to a formula that looks to various measures of value
contained in an independent appraisal of the restaurant property. As the
general partners, we negotiated only such formulae that we expected would
result in reasonable approximations of the fair market value of the restaurant
property at the time the option is exercised.
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
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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 will have the right to offer
the Income Fund the opportunity to exchange the restaurant property for another
restaurant property, with a value of not less than the current value of the
original leased restaurant property as determined by an independent appraisal
of both restaurant properties.
Generally, if the Income Fund approves the substitution, a closing 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
adequately insures the restaurant property.
The lessees generally are required to maintain the restaurant property and
repair any damage to the restaurant property, except damage occurring during
the last 24 months of the lease term, as extended, which in the opinion of the
lessee renders the restaurant property unsuitable for occupancy, in which case
the lessee will have the right instead to pay the insurance proceeds to the
Income Fund and terminate the lease.
Joint Venture/Tenancy in Common Arrangements
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, acquires 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, we or our
affiliates are entitled to reimbursement, at cost, for actual expenses incurred
by us or our affiliates on behalf of
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<PAGE>
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 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 you or under arrangements that would make you liable to
creditors of an Income Fund. In general, we have limited each Income Fund's
outstanding indebtedness to 3.0% of the aggregate adjusted tax basis of its
restaurant properties and we have used, and will continue to use, our
reasonable efforts to structure any borrowing so that it will not constitute
"acquisition indebtedness" for federal income tax purposes. In addition,
generally an Income Fund may not incur indebtedness unless it first obtains an
opinion of counsel that such borrowing will not constitute acquisition
indebtedness. Notwithstanding the foregoing, we or our affiliates are entitled
to reimbursement, at cost, for actual expenses incurred by us or our affiliates
on behalf of an Income Fund.
Sale of Restaurant Properties
The Income Funds generally hold their restaurant properties until we
determine either that their sale or other disposition is advantageous in view
of each Income Fund's investment objectives, or that such objectives will not
be met. Generally, we intend to sell each Income Fund's restaurant properties
within 7 to 12 years after their acquisition or as soon thereafter as market
conditions permit. In deciding whether to sell restaurant properties, we will
consider factors such as potential capital appreciation, net cash flow, and
federal income tax
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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." No Income Fund has any obligation to sell all or any
portion of a restaurant property at any particular time, except as may be
required under lessee or joint venture purchase options.
Net sales proceeds not reinvested in restaurant properties or used to
establish reserves deemed necessary or advisable by us are distributed to the
Limited Partners in accordance with each Income Fund's partnership agreement.
If we determine, however, that it is in the interest of an Income Fund to
reinvest net sales proceeds in restaurant properties, net sales proceeds will
be reinvested only if sufficient cash also is distributed to the Limited
Partners to pay any state income tax, at a rate reasonably assumed by us, and
federal income tax, assuming the Limited Partners' income is taxable at the
maximum federal income tax rate then applicable to individuals for capital
gains, created by the disposition. Net cash flow is not invested in restaurant
properties.
In connection with sales of restaurant properties by the Income Funds,
purchase money security interests may be taken by the Income Funds as part
payment of the sales price. The terms of payment are affected by custom in the
area in which the restaurant property is located and by prevailing economic
conditions. When a purchase money security interests is accepted in lieu of
cash upon the sale of an Income Fund's restaurant property, the Income Fund
continues to have a mortgage on the restaurant property and the proceeds of the
sale will be realized over a period of years rather than at closing of the
sale.
Competition
The competitive environment in which the Income Funds operate is
substantially similar to that of the APF, as described above on page 145.
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POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain investment, financing and other
policies of APF and of the Income Funds. In the case of APF, APF's Board of
Directors has determined these policies, and generally, the Board may amend or
revise such policies from time to time without a vote of the stockholders. For
the Income Funds, the policies have been set according to the investment
objectives set forth in the partnership agreement governing each Income Fund.
The description included here regarding the Income Funds is general to all the
Income Funds.
Since its inception, APF has primarily engaged in acquiring and triple-net
leasing restaurant properties and secondarily has made mortgage loans to
operators of national and regional restaurant chains. Upon the acquisition of
the CNL Restaurant Businesses, APF has increased its mortgage business
substantially, although it will still primarily be engaged in the acquisition
and triple-net leasing of restaurant properties. APF's Articles of
Incorporation do not place a percentage limit on the percentage of assets which
APF may invest in real estate, mortgages, or securities of persons primarily
engaged in real estate, nor do they restrict the amount of resources that may
be invested in a single property.
APF
Investment Policies
Real Estate Investments. Using its line of credit or cash available from
operations or financings, APF seeks to generate income by acquiring and
managing a diversified portfolio of real estate and other assets across the
United States. APF has focused and intends to continue to focus its real estate
investments on properties to be leased to operators of national and regional
restaurant chains; however APF's Articles of Incorporation do not restrict its
real estate investments to restaurant properties. In its real estate
activities, APF seeks to structure triple-net leases and to acquire restaurant
properties subject to leases that generally provide: (1) that the tenant is
responsible for all operating and capital expenses, except for certain
environmental and other contingent liabilities, (2) for contractual rent
increases over the term of the lease and (3) for primary lease terms of 15 to
20 years, with two to five renewals of five years each. While APF generally
intends to hold its restaurant properties for long-term investment, APF may
dispose of a restaurant property if it deems such disposition to be in its best
interests. APF may also sell restaurant properties to tenants pursuant to
purchase options included in certain leases. For a more detailed discussion of
the evaluation of the investment in potential restaurant properties, see "APF's
Business and the Restaurant Properties--APF's Business--Evaluation of
Investment Opportunities."
Securities of or Interests in Persons Primarily Engaged in Real Estate
Activities and Other Issuers. APF may in the future invest in securities of
entities engaged in real estate activities or securities of other issuers,
including for the purpose of exercising control over such entities. APF may
acquire all or substantially all of the securities or assets of REITs or
similar entities where such investments would be consistent with its investment
policies. APF may also receive an equity interest or rights to purchase equity
interests in tenants or affiliates of tenants in connection with sale-leaseback
transactions. In any event, APF does not intend that its investments in
securities will require it to register as an "Investment Company" under the
Investment Company Act of 1940, as amended, and APF would divest itself of such
securities before any such registration would be required.
Joint Ventures and Wholly-Owned Subsidiaries. APF may in the future enter
into joint ventures or general partnerships and other participations with real
estate developers, owners and others for the purpose of obtaining an equity
interest in a particular property or properties in accordance with APF's
investment policies. Such investments permit APF to own interests in large
properties without unduly restricting diversification and, therefore, add
flexibility in structuring APF's portfolio.
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Engaging in the Purchase and Sale of Investments and Investing in the
Securities of Others for the Purpose of Exercising Control. As part of its
investment activities, APF may acquire, own and dispose of general and limited
partner interests, stock, warrants, options or other equity interests in
entities and exercise all rights and powers granted to the owner of any such
interests.
Offering Securities in Exchange for Property. APF may offer APF Shares,
Operating Partnership units or other APF securities in exchange for a
restaurant property.
Repurchasing or Reacquiring Its Own Shares. APF may purchase or repurchase
APF Shares from any person for such consideration as the Board of Directors may
determine in its reasonable discretion, whether more or less than the original
issuance price of such APF Share or the then trading price of such APF Share.
Investments in Real Estate Mortgages. APF originates mortgages to operators
of national and regional restaurant chains, or their affiliates, to enable them
to acquire restaurant properties. APF also securitizes the mortgage loans by
contributing them to a trust which subsequently issues trust certificates
representing beneficial ownership interests in the pool of mortgage loans. The
net proceeds of the offering of the trust certificates are then contributed
back to APF. The mortgage loans are not insured by a governmental agency.
Financing Policies
Issuance of Additional Securities. APF's Board of Directors may, in its
discretion, issue additional equity securities. APF expects to issue additional
equity from time to time to increase its available capital. The issuance of
additional equity interests may result in the dilution of the interests of the
APF stockholders at the time of such issuance.
Issuance of Senior Securities. APF may at any time issue securities senior
to the APF Shares, upon such terms and conditions as may be determined by the
Board of Directors.
Borrowing Policy. APF may, at any time, borrow, on a secured or unsecured
basis, funds to finance its business and in connection therewith execute, issue
and deliver promissory notes, commercial paper, notes, debentures, bonds and
other debt obligations which may be convertible into APF Shares or other equity
interests or be issued together with warrants to acquire APF Shares or other
equity interests.
Miscellaneous Policies
Making Annual or Other Reports to Stockholders. APF is subject to the
reporting requirements of the Exchange Act and will file annual and quarterly
reports thereunder. APF currently intends to provide annual and quarterly
reports to its stockholders.
Restrictions on Related Party Transactions. APF's bylaws prohibit APF from
engaging in a transaction with a director, officer, advisor, person owning or
controlling 10% or more of any class of APF's outstanding voting securities or
any affiliate of such persons, to all of whom we refer to here as the
interested parties, except to the extent that such transactions are
specifically authorized by the terms of the bylaws. The bylaws will permit a
transaction, including the acquisition of property, with any of the interested
parties, however, if the terms or conditions of such transaction have been
disclosed to the Board of Directors and approved by a majority of directors not
otherwise interested in the transaction, and such directors, in approving the
transaction, have determined the transaction to be fair, competitive,
commercially reasonable and on terms and conditions no less favorable to APF
than those available from unaffiliated third parties.
Company Control. The Board of Directors has exclusive control over APF's
business and affairs subject only to the restrictions in the APF's Articles of
Incorporation and bylaws. Stockholders have the right to elect members of the
Board of Directors. The Directors are accountable to APF as fiduciaries and are
required to exercise good faith and integrity in conducting APF's affairs as
described in "Fiduciary Responsibility" on page 168.
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Working Capital Reserves
APF will maintain working capital reserves or immediate borrowing capacity
in amounts that the Board of Directors determines to be adequate to meet normal
contingencies in connection with the operation of APF's business and
investments.
The Income Funds
Investment Policies
Real Estate Investments. The Income Funds' primary investment activity is to
acquire and manage a diversified portfolio of real estate assets. In their real
estate activities, the Income Funds seek to structure triple-net leases and to
acquire properties subject to leases that generally have the following terms:
. tenant responsibility for all operating and capital expenses, except for
certain environmental and other contingent liabilities;
. contractual rent increases over the term of the lease; and
. primary lease terms of 15 to 20 years, with two to five renewal options
of five years each.
While the Income Funds generally hold their restaurant properties for long-
term investment, an Income Fund may dispose of a restaurant property if the
general partners deem such disposition to be in its best interests. Generally,
any proceeds from such disposition must be distributed to the partners in the
Income Fund according to the terms of the partnership agreements governing such
Income Fund. The Income Funds are finite term entities which are structured to
dissolve when the assets of the Income Funds are liquidated, or after
approximately 35 years. For a discussion of the evaluation and selection of
restaurant properties, see "Business of the Income Funds--Site Selection and
Acquisition of Restaurant Properties."
Joint Ventures/Tenancy in Common Arrangements. Each of the Income Funds may
enter into joint venture or tenancy in common arrangements and other
participations with others for the purpose of obtaining an equity interest in a
particular property or properties in accordance with the Income Fund's
investment policies. Such investments permit a Fund to own interests in large
properties without unduly restricting diversification and, therefore, add
flexibility in structuring the Income Fund's portfolio.
Financing
The Income Funds are generally prohibited from or restricted in the amount
and nature of borrowings. Additionally, none of the Income Funds are authorized
to raise additional capital for, or reinvest the net sale or refinancing
proceeds in, new investments, absent amendments to their partnership
agreements.
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MANAGEMENT
Directors and Executive Officers
The directors and executive officers of APF are listed below:
<TABLE>
<CAPTION>
Name Age Position with APF
---- --- --------------------------------------------------
<S> <C> <C>
James M. Seneff, Jr...... 52 Chairman of the Board of Directors
Robert A. Bourne......... 52 Vice Chairman of the Board of Directors
G. Richard Hostetter..... 59 Independent Director
J. Joseph Kruse.......... 66 Independent Director
Richard C. Huseman....... 60 Independent Director
Curtis B. McWilliams..... 43 Chief Executive Officer
John T. Walker........... 40 President and Chief Operating Officer
Howard J. Singer......... 56 Executive Vice President of Development Operations
Barry L. Goff............ 37 Senior Vice President and Chief Investment Officer
Steven D. Shackelford.... 35 Senior Vice President and Chief Financial Officer
Michael I. Wood.......... 37 Senior Vice President of Asset Management
Timothy J. Neville....... 50 Senior Vice President and Chief Credit Officer
Robert W. Chapin Jr...... 37 Senior Vice President of Development Operations
</TABLE>
James M. Seneff, Jr. has served as Chairman of the Board of Directors of APF
since December 1994 and as a director since May 1994. Mr. Seneff also served as
Chief Executive Officer of APF from May 1994 to 1999. Prior to the
acquisition of the CNL Restaurant Businesses, Mr. Seneff served as Chairman of
the Board, Chief Executive Officer and a director of the Advisor from March
1994 to 1999. Mr. Seneff is a principal stockholder of CNL Group, Inc., a
diversified real estate company, and has served as its Chairman of the Board of
Directors, a director and Chief Executive Officer since its formation in 1980.
In addition, Mr. Seneff has served as Chairman of the Board, Chief Executive
Officer and a director of CNL Hospitality Properties, Inc. since June 1996 and
of CNL Health Care Properties, Inc. since December 1997, two public, unlisted
REITs. Mr. Seneff also has served as Chief Executive Officer, a director and
Chairman of the Board of Directors of Commercial Net Lease Realty, Inc., a
publicly-traded REIT, listed on the NYSE, since 1992 and served as Chief
Executive Officer, a director and Chairman of the Board of Directors of CNL
Realty Advisors, Inc. from its inception in May 1992 through December 1997, at
which time such company merged with Commercial Net Lease Realty, Inc. Mr.
Seneff has served as a member of the board of directors of First Union National
Bank of Florida since May 1998 and has served as a member of the Orlando
Advisory Board of First Union National Bank of Florida since March 1994. Mr.
Seneff received his degree in Business Administration from Florida State
University in 1968.
Robert A. Bourne has served as a Vice Chairman of the Board of Directors of
APF since February 1999 and has served as a director of APF since May 1994. He
also served in various executive positions, including President, with APF from
May 1994 to 1999, the most recent of which was Treasurer. Mr. Bourne
served as a director of the Advisor from March 1994 through , 1999,
served as Treasurer and Vice Chairman of the Board from September 1997 through
, 1999 and served as President from March 1994 through September 1997. In
addition, Mr. Bourne served in several executive positions, including President
and currently serves as Vice Chairman of the Board of Directors for CNL
Financial Services, Inc. and served in several executive positions, including
President, and currently serves as Vice Chairman of the Board for CNL Financial
Corporation. Mr. Bourne served as President of Commercial Net Lease Realty,
Inc. from July 1992 to February 1996, served as Secretary and Treasurer from
February 1996 through December 1997, has served as a director since July 1992
and as Vice Chairman of the Board of Directors since February 1996. In
addition, Mr. Bourne served as President of CNL Realty Advisors, Inc. from May
1992 to February 1996, served as a director from May 1992 through December
1997, and as Treasurer and Vice Chairman from February 1996 through December
1997, at which time such company merged with Commercial Net Lease Realty, Inc.
Mr. Bourne has served as President and a director of CNL Hospitality
Properties, Inc. since June 1996 and CNL Health Care Properties, Inc. since
December 1997. In addition, Mr. Bourne oversaw the
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acquisition and the management of over 1,500 properties located across 47
states with a total value in excess of $2 billion. Mr. Bourne received a
Bachelor of Science Degree in Accounting, with honors, from Florida State
University in 1970.
G. Richard Hostetter, Esq. has served as an Independent Director of APF
since March 1995. Mr. Hostetter served as a director of CNL Hospitality
Properties, Inc. from July 1997 until February 1999. Mr. Hostetter was
associated with the law firm of Miller and Martin from 1966 through 1989, the
last ten years of such association as a senior partner. As a lawyer, he served
for more than 20 years as counsel for various corporate real estate groups,
fast-food companies and public companies, including The Krystal Company,
resulting in his extensive participation in transactions involving the sale,
lease, and sale/leaseback of approximately 250 restaurant units. Mr. Hostetter
graduated from the University of Georgia and received his Juris Doctor from
Emory Law School in 1966. He is licensed to practice law in Tennessee and
Georgia. From 1989 through 1998, Mr. Hostetter served as President and General
Counsel of Mills, Ragland & Hostetter, Inc., the corporate general partner of
MRH, L.P., a holding company involved in corporate acquisitions, in which he
also was a general and limited partner. Since January 1, 1999, Mr. Hostetter
has served as President and General Counsel of MRH, Inc. which manages two of
the businesses formerly owned by MRH, L.P.
J. Joseph Kruse has served as an Independent Director of APF since March
1995. Mr. Kruse also served as a director of CNL Hospitality Properties, Inc.
from July 1997 to February 1999. From 1993 to the present, Mr. Kruse has been
President and Chief Executive Officer of Kruse & Co., Inc., a merchant banking
company engaged in real estate. Mr. Kruse also serves as a director of Gateway
American Bank of Florida and Chairman of Topsider Building Systems. Formerly,
Mr. Kruse was a Senior Vice President with Textron, Inc. for twenty years, and
then served as Senior Vice President at G. William Miller & Co., a firm founded
by a former Chairman of the Federal Reserve Board and the Secretary of the
Treasury of the United States. Mr. Kruse was responsible for evaluations of
commercial real estate and retail shopping mall projects and continues to serve
as counsel to the firm. Mr. Kruse received a Bachelor of Science degree in
Education from the University of Florida in 1957 and a Master of Science degree
in Administration in 1958 from Florida State University. He also graduated from
the Advanced Management Program of the Harvard Graduate School of Business.
Richard C. Huseman has served as an Independent Director of APF since March
1995. Mr. Huseman also served as a director of CNL Hospitality Properties, Inc.
from July 1997 to February 1999. Mr. Huseman is presently a professor in the
College of Business Administration, and from 1990 through 1995, served as the
Dean of the College of Business Administration of the University of Central
Florida. He has served as a consultant in the area of managerial strategies to
a number of Fortune 500 corporations, including IBM, AT&T, and 3M, as well as
to several branches of the U.S. government, including the U.S. Department of
Health and Human Services, the U.S. Department of Justice, and the Internal
Revenue Service. Mr. Huseman received a Bachelor of Arts degree from Greenville
College in 1961 and an Master of Arts degree and a Ph.D. from the University of
Illinois in 1963 and 1965, respectively.
Curtis B. McWilliams has served as Chief Executive Officer of APF since
, 1999. Prior to the acquisition of the CNL Restaurant Businesses, Mr.
McWilliams served as President of APF from February 1999 until , 1999. From
April 1997 to February 1999, Mr. McWilliams served as Executive Vice President
of APF. Mr. McWilliams joined CNL Group, Inc. in April 1997 and currently
serves as an Executive Vice President. In addition, Mr. McWilliams served as
President of the Advisor and CNL Financial Services, Inc. from April 1997 until
the acquisition of such entities by APF in , 1999. From September 1983
through March 1997, Mr. McWilliams was employed by Merrill Lynch & Co. The
majority of his career at Merrill Lynch & Co. was in the Investment Banking
division where he served as a Managing Director. Mr. McWilliams received a
B.S.E. in Chemical Engineering from Princeton University in 1977 and a Master
of Business Administration degree with a concentration in finance from the
University of Chicago in 1983.
John T. Walker has served as President and Chief Operating Officer and
Executive Vice President of APF since , 1999. Mr. Walker joined the Advisor
in September 1994, as Senior Vice President, responsible for Research and
Development and served as the Chief Operating Officer of the Advisor from April
1995 until its acquisition by APF in 1999 and served as Executive Vice
President of the Advisor from January
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1996 until its acquisition by APF. Mr. Walker also served as Executive Vice
President of CNL Hospitality Properties, Inc. and CNL Hospitality Advisors,
Inc. from 1997 to October 1998. From May 1992 to May 1994, he was Executive
Vice President for Finance and Administration and Chief Financial Officer of Z
Music, Inc., a cable television network which was subsequently acquired by
Gaylord Entertainment, where he was responsible for overall financial and
administrative management and planning. From January 1990 through April 1992,
Mr. Walker was Chief Financial Officer of the First Baptist Church in Orlando,
Florida. From April 1984 through December 1989, he was a partner in the
accounting firm of Chastang, Ferrell & Walker, P.A., where he was the partner
in charge of audit and consulting services, and from 1981 to 1984, Mr. Walker
was a Senior Consultant/Audit Senior at Price Waterhouse. Mr. Walker is a cum
laude graduate of Wake Forest University with a Bachelor of Science degree in
Accountancy and is a certified public accountant.
Howard J. Singer has served as Executive Vice President of Development
Operations of APF since , 1999. Mr. Singer joined CNL Restaurant
Development, Inc. in October 1995 and served as chief operating officer for
that company until , 1999, responsible for complete services ranging from
site selection, site development and construction. From October 1986 to
September 1995, Mr. Singer was executive vice president of development for Long
John Silver's. He has also worked for KFC Corporation and Burger King
Corporation where he held positions in development, franchising, national and
international operations. Mr. Singer received a Bachelor of Science degree from
the University of Florida in 1965 and a Juris Doctor from the University of
Miami in 1972.
Barry L. Goff has served as Chief Investment Officer and Senior Vice
President of APF since 1999. Mr. Goff joined the Advisor in August 1998 as
Chief Investment Officer and served in such position until , 1999. Mr. Goff
is responsible for marketing APF's restaurant finance, development and
strategic advisory services and products to the restaurant industry. Prior to
joining the Advisor and from 1989 to July 1998, Mr. Goff was a shareholder of
Lowndes, Droskick, Doster, Kantor & Reed, PA., a law firm, in Orlando, Florida
where he specialized in U.S. and international taxation. Prior to joining
Lowndes in 1989, Mr. Goff practiced law with Loeb & Loeb in Los Angeles. Mr.
Goff received his Bachelor of Science degree in Business Administration from
the University of Central Florida in 1983, his Juris Doctor degree from the
University of Florida in 1986 and a Master of Laws in Taxation from New York
University in 1988.
Steven D. Shackelford has served as Senior Vice President and Chief
Financial Officer of APF since January 1997. He also served as Chief Financial
Officer of the Advisor from September 1996 to , 1999. From March 1995 to
July 1996, Mr. Shackelford was a senior manager in the national office of Price
Waterhouse LLP where he was responsible for advising foreign clients seeking to
raise capital and a public listing in the United States. From August 1992 to
March 1995, he was a manager in the Paris, France office of Price Waterhouse,
serving several multinational clients. Mr. Shackelford was an audit staff and
senior from 1986 to 1992 in the Orlando, Florida office of Price Waterhouse.
Mr. Shackelford received a Bachelor in Arts degree in Accounting, with honors,
and a Master of Business Administration degree from Florida State University
and is a certified public accountant.
Michael I. Wood has served as Senior Vice President of Asset Management
since , 1999. Mr. Wood joined the Advisor in September 1997 and was
appointed Senior Vice President of Asset Management in December 1997, serving
in such position until , 1999. Mr. Wood is responsible for overseeing the
property management and portfolio management of the various portfolios advised
by APF. Prior to joining the Advisor, Mr. Wood spent more than 10 years with
Xerox Corporation in a variety of positions in its real estate investment and
corporate real estate divisions. His most recent position with Xerox was as
manager of real estate acquisitions and dispositions where he was responsible
for Xerox's major real estate projects. Mr. Wood has achieved the professional
designation of Certified Commercial Investment Member. He received a Bachelor
of Science degree in Computer Science and a Master of Business Administration
degree from the University of North Carolina at Chapel Hill.
Timothy J. Neville has served as Senior Vice President and Chief Credit
Officer of APF since 1999. Mr. Neville was Senior Vice President and Chief
Credit Officer of CNL Financial Services, Inc.,
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responsible for underwriting loans to select operators of top restaurant
chains, from mid 1997 to , 1999. He has more than 25 years of lending and
risk management experience at major financial institutions. From to mid
1997, Mr. Neville served as Executive Vice President and Senior Credit Policy
Officer at Barnett Bank, N.A. In that capacity, he was responsible for loan
approval, asset quality and portfolio management of a loan portfolio totaling
$1.4 billion. Prior responsibilities included management of lending departments
and lending teams with various financial institutions. Mr. Neville earned a
Master in Business Administration degree, from Xavier University and a Bachelor
of Business Administration degree from the University of Cincinnati.
Robert W. Chapin, Jr. has served as Senior Vice President of Operations of
APF since , 1999. In July 1997, Mr. Chapin joined CNL Restaurant
Development, Inc., in June 1998 and was Senior Vice President of Development
Operations for that Company until , 1999, responsible for complete
development services ranging from site selection, site development and
construction management. From July 1997 to June 1998, Mr. Chapin served as a
full-time consultant with CNL Group, Inc., working on a number of strategic
project initiatives. From November 1994 to June 1997, Mr. Chapin served as
President of Leader Enterprises, a full-service sports marketing firm. From
October 1989 to November 1994, Mr. Chapin was employed by VOA Associates, a
Chicago-based design and development company, most recently as managing
principal of the Florida office. Mr. Chapin received his Bachelor of Science
degree from Appalachian State University.
Board of Directors
General. APF will operate under the direction of its Board of Directors, the
members of which are accountable to APF as fiduciaries.
APF currently has five directors. It may have no fewer than three directors
and no more than 15. Directors will be elected annually, and each director will
hold office until the next annual meeting of stockholders or until his
successor has been duly elected and qualified. There is no limit on the number
of times that a director may be elected to office. Although the number of
directors may be increased or decreased as discussed above, a decrease shall
not have the effect of shortening the term of any incumbent director.
Any director may resign at any time and may be removed with or without cause
only by the stockholders upon the affirmative vote of at least a majority of
all the shares of common stock outstanding and entitled to vote in the election
of the directors. The notice of such meeting shall indicate that the purpose,
or one of the purposes, of such meeting is to determine if a director shall be
removed.
Committees of the Board of Directors. Pursuant to APF's Articles of
Incorporation, the Board of Directors may establish committees as it deems
appropriate. Currently, APF has an Audit Committee which consists of APF's
three independent directors. The Audit Committee makes recommendations
concerning the engagement of independent public accountants, reviews with the
independent public accountants the plans and results of the audit engagement,
approves professional services provided by the independent public accountants,
reviews the independence of the independent public accountants, considers the
range of audit and non-audit fees and reviews the adequacy of APF's internal
accounting controls.
In addition to the Audit Committee, APF has a Compensation Committee. The
Compensation Committee consists of three independent directors who advise the
Board of Directors on all matters pertaining to compensation programs and
policies and establish guidelines for employee incentive and benefits programs
which the committee reviews on a continuous basis. It makes specific
recommendations relating to salaries of officers and all incentive awards.
Promptly following the consummation of the Acquisition, the Board of
Directors expects to establish an Executive Committee. The Executive Committee
will consist of a minimum of three directors, including Messrs. Seneff and
Bourne. The Executive Committee will have the authority to acquire, dispose of
and finance
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investments for APF and execute contracts and agreements, including those
related to the borrowing of money by APF and generally exercise all other
powers of the Board of Directors except for those which require action by all
the directors or the independent directors under the Articles of Incorporation
or the bylaws of APF, or under applicable law.
The Board of Directors may from time to time establish certain other
committees to facilitate APF's management. The Board of Directors initially
will not have a nominating committee and the entire Board of Directors will
perform the function of such committee.
Compensation of Directors. Each Director is entitled to receive $6,000
annually for serving on the Board of Directors, as well as fees of $750 per
meeting attended ($375 for each telephonic meeting in which the Director
participates), including committee meetings. No executive officer or Director
of APF has received a bonus from APF.
Executive Compensation
The following Summary Compensation Table shows the annual and long-term
compensation to be paid by APF to the Chief Executive Officer and the top four
other most highly compensated executive officers for services to be rendered in
all capacities to APF during the year following the Acquisition, assuming the
completion of the Acquisition as of December 31, 1999.
<TABLE>
<CAPTION>
Annual
Compensation
--------------
Name and Principal Position Salary Bonus
--------------------------- -------- -----
<S> <C> <C>
Curtis B. McWilliams, Chief Executive Officer................ $300,000 n/a
John T. Walker, President and Chief Operating Officer........ 225,000 n/a
Steven D. Shackelford, Senior Vice President and Chief
Financial Officer........................................... 170,000 n/a
Barry L. Goff, Senior Vice President and Chief Investment
Officer..................................................... 170,000 n/a
Timothy J. Neville, Senior Vice President and Chief Credit
Officer..................................................... 150,000 n/a
</TABLE>
To date, APF has not granted to its Chief Executive Officer or to any other
executive officer any options to purchase common stock pursuant to an
established stock incentive plan or otherwise.
Employment Agreements
Effective , 1999 APF entered into employment agreements with Curtis B.
McWilliams, Steven D. Shackleford, John T. Walker, Howard J. Singer, Barry L.
Goff and Robert W. Chapin, Jr. Each of the employment agreements terminate on
December 31, 2001 and provide for a discretionary bonus. APF has also entered
into noncompetition agreements with each of Messrs. Seneff and Bourne providing
that, subject to certain exceptions, they will not engage in specified
activities in the restaurant industry.
1999 Performance Incentive Plan
At its 1999 annual meeting on May 27, 1999, APF's stockholders approved 1999
Performance Incentive Plan. The Board believes that the Incentive Plan is in
the best interest of APF and will enable it to attract and retain highly
qualified executive officers, directors and employees.
The Incentive Plan is qualified under Rule 16b-3 under the Exchange Act. The
Incentive Plan will be administered by the Compensation Committee and provides
for the granting of options, stock appreciation rights or restricted stock.
Under the Incentive Plan, 2,250,000 APF Shares are available for issuance to
executive officers, directors or other key employees of APF, which number may
increase over time based on the number of outstanding APF Shares. Options to
acquire APF Shares are expected to be in the form of non-statutory stock
options and are exercisable for up to 10 years following the date of the grant.
The exercise price of each option will be set by the Compensation Committee,
but the Incentive Plan requires that the price per APF Share must be equal to
or greater than the fair market value of the APF Shares on the grant date.
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The Incentive Plan also provides for the issuance of stock appreciation
rights and restricted APF Shares to executive officers, directors or other key
employees upon such terms and conditions as shall be determined by the
Compensation Committee in its sole discretion and other performance-based
incentives. The Incentive Plan generally entitles a holder to receive cash or
stock, as determined by the Compensation Committee at the time of exercise,
equal to the difference between the exercise price and the fair market value of
the APF Shares.
Other Incentive Compensation
APF has established an incentive compensation plan for key officers of APF.
This plan provides for payment of cash bonuses to participating officers after
evaluating the officer's performance and the overall performance of APF. The
Chief Executive Officer makes recommendations to the Compensation Committee of
the Board of Directors, which makes the final determination for the award of
bonuses. The Compensation Committee determines such bonuses, if any, for the
Chief Executive Officer.
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PRINCIPAL STOCKHOLDERS OF APF
We have provided in the table below certain information regarding the
beneficial ownership of the APF Shares as of June 15, 1999 assuming the
completion of the acquisition of the CNL Restaurant Businesses by APF, and as
adjusted to give effect to the issuance of APF Shares in the Acquisition
assuming that APF acquires 100% of the Income Funds, by (i) each person or
entity known by APF to beneficially own 5% or more of the outstanding APF
Shares, (ii) the Chief Executive Officer, James M. Seneff, (iii) the directors
of APF, and (iv) all executive officers and directors, as a group.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to the Acquisition After the Acquisition
----------------------------- ---------------------
Name of Beneficial Owner (2) Number Percent (1) Number Percent (1)
- ---------------------------- -------------- -------------- --------- -----------
<S> <C> <C> <C> <C>
James M. Seneff, Jr........ 3,721,671 8.6% 3,790,746 5.4
Robert A. Bourne........... 988,108 2.3% 1,057,182 1.5
G. Richard Hostetter (3)... 2,740 * 2,740 *
J. Joseph Kruse............ -- -- -- --
Richard C. Huseman......... -- -- -- --
All executive officers and
directors as a group
(13 persons).............. 5,253,615 12.1% 5,391,764 7.6
</TABLE>
- --------
* Less than 1%.
(1) The percentage ownership prior to the Acquisition is based on 43,498,464
shares of APF Shares outstanding as of June 30, 1999 as adjusted to reflect
the acquisition of the CNL Restaurant Businesses by APF and giving effect
to a one-for-two reverse stock split approved by the APF stockholders at
their annual meeting and effective as of June 3, 1999. The percentage
ownership after the Acquisition is based on 70,526,807 APF Shares
outstanding upon completion of the Acquisition assuming the Acquisition of
100% of the Income Funds and adjusted for the payment by the Income Funds
of certain expenses of the Acquisition to be paid by the Income Funds in
the form of a reduction in the number of APF Shares paid to each Income
Fund. Beneficial ownership is determined in accordance with the rules of
the SEC. For each beneficial owner, APF Shares subject to options or
conversion rights exercisable within 60 days of June 15, 1999 are deemed
outstanding.
(2) Except as specifically noted in the footnotes below, the address of each of
the named beneficial owners is c/o APF, 400 East South Street, Orlando,
Florida 32801.
(3) Represents shares held by Sun Trust Bank of Chattanooga in an IRA.
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FIDUCIARY RESPONSIBILITY
Directors and Officers of the Company
The directors are accountable to APF and its stockholders as fiduciaries and
must perform their duties in good faith, in a manner believed to be in APF's
best interests and that of its stockholders and with such care, including
reasonable inquiry, as an ordinarily prudent person in a like position would
use under similar circumstances. APF's Articles of Incorporation provide that
the directors will not be personally liable to APF or to any stockholder for
the breach of a fiduciary responsibility, to the full extent that such
limitation or elimination of liability is permitted under Maryland law. The
bylaws provide that APF will indemnify its directors and officers to the full
extent permitted under Maryland law. Pursuant to the bylaws and the MGCL, APF
will indemnify each director and officer against any liability and related
expenses, including attorneys' fees, incurred in connection with any proceeding
in which he may be involved by reason of his or her service in such position so
long as the director or officer acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to APF's best interest, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful.
A director and officer is also entitled to indemnification against expenses
incurred in any action or suit by or on behalf of APF to procure a judgment in
its favor by reason of his or her service in such position if the director or
officer acted in good faith and in a manner reasonably believed to be in or not
opposed to APF's best interests, except that no such indemnification will be
made if the director or officer is judged to be liable to APF, unless the
applicable court of law determines that despite the adjudication of liability
the director or officer is reasonably entitled to indemnification for such
expenses. The bylaws authorize APF to advance funds to a director or officer
for costs and expenses, including attorneys' fees, incurred in a suit or
proceeding upon receipt of an undertaking by such director or officer to repay
such amounts if it is ultimately determined that he is not entitled to be
indemnified. APF has entered into agreements with its directors and executive
officers, indemnifying them to the fullest extent permitted by Maryland law. If
the Acquisition is consummated, you and other stockholders of APF, may have
more limited recourse against the directors and officers than you would have
absent these agreements and the provisions in APF's Articles of Incorporation
and bylaws.
To the extent that these indemnification provisions apply to actions arising
under the Securities Act, APF has been informed that, in the opinion of the
SEC, such indemnification provisions are contrary to public policy as expressed
in the Securities Act and therefore are not enforceable. APF has obtained
insurance policies indemnifying the directors and officers against certain
civil liabilities, including liabilities under the federal securities laws,
which might be incurred by them in such capacity.
General Partners of the Income Funds
Under Florida partnership law, we are accountable to the Income Funds as
fiduciaries and owe each Income Fund and the partners a duty of loyalty and
duty of care and are required to exercise good faith and fair dealing in
conducting the Income Fund's affairs. Each Income Fund's partnership agreement
generally provides that neither we, as general partners, nor any of our
affiliates performing services on behalf of the Income Fund will be liable to
the Income Fund or any of the Limited Partners for any act or omission by us
performed in good faith pursuant to authority granted to us by the partnership
agreement, or in accordance with its provisions, and any manner we reasonably
believed to be within the scope of our authority and in the best interests of
the Income Fund, provided that such act or omission did not constitute
negligent misconduct or a breach of our fiduciary duty. As a result, you and
the other Limited Partners might have a more limited right of action in certain
circumstances than you would have in the absence of such a provision in the
partnership agreements.
Each Income Fund's partnership agreements also generally provide that we and
certain of our affiliates are indemnified from losses relating to acts
performed or failures to act in connection with the business of the Income
Fund, except to the extent indemnification is prohibited by law, provided that
we or our affiliate determined in good faith that the course of conduct was in
the best interests of the Income Fund and provided
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<PAGE>
further that the course of conduct did not constitute negligence, misconduct,
or breach of our fiduciary duty. Notwithstanding the foregoing, neither we nor
any of our affiliates will be indemnified by any Income Fund from any
liability, loss, damage, cost or expense incurred by us or any affiliate in
connection with any claim involving allegations that we or our affiliate
violated federal or state securities laws unless:
. a court has held in our or our affiliate's favor on the merits of the
claims of each count involving alleged securities law violations as to
the person seeking indemnification and the court approves indemnification
of the litigation costs,
. a court of competent jurisdiction has dismissed such claims with
prejudice on the merits, and the court approves indemnification of the
litigation costs, or
. a court of competent jurisdiction has approved a settlement of the claims
against the person seeking indemnification and finds that indemnification
of the settlement and related costs should be made.
In each of the situations described above, the court of law considering the
request for indemnification must be advised as to the position of the SEC, the
Florida Department of Banking and Finance and any other applicable regulatory
authority regarding indemnification for violations of securities laws. Any
indemnification may not be enforceable as to certain liabilities arising from
claims under the Securities Act and state securities laws, and, in the opinion
of the SEC, such indemnification is contrary to public policy and is therefore
unenforceable. For purposes of the foregoing, our affiliates will be
indemnified only when operating within the scope of our authority. Any claim
for indemnification under a partnership agreement will be satisfied only out of
the assets of the Income Fund, and no Limited Partner has any personal
liability to satisfy an indemnification claim made against the Income Fund.
Each Income Fund may also advance funds to a third person indemnified under
the partnership agreement for legal expenses incurred as a result of legal
action brought against such person if;
. the legal action relates to the performance of duties or services by such
person on behalf of the Income Fund,
. the legal action is initiated by a party other than a Limited Partner,
and
. such person undertakes to repay the advanced funds to the Income Fund if
it is subsequently determined that such person is not entitled to
indemnification pursuant to the terms of the partnership agreement.
The partnership agreement of each Income Fund provides that the Income Fund
may pay the attorneys fees of a person indemnified under the partnership
agreement as they are incurred. No Income Fund pays for any insurance covering
liability of the general partners or any other indemnified person for acts or
omissions for which indemnification is not permitted by its partnership
agreement, although we may be named as additional insured parties on policies
obtained for the benefit of the Income Fund if there is no additional cost to
such Income Fund. As part of its assumption of liabilities in the Acquisition,
APF will indemnify us and our affiliates for periods prior to and following the
Acquisition to the extent of our and our affiliates' indemnity under the terms
of the partnership agreements and applicable law.
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DESCRIPTION OF CAPITAL STOCK
APF is currently soliciting the approval of its stockholders for a number
of amendments to APF's Articles of Incorporation, including an increase in the
number of APF's authorized shares of capital stock. Upon the receipt of
stockholder approval, APF's Articles of Incorporation will authorize a total
of 178,000,000 shares of capital stock, consisting of 137,500,000 shares of
common stock, $.01 par value per share, 3,000,000 shares of preferred stock,
and 78,000,000 additional shares of excess stock, $.01 par value per share.
See "--Ownership Limits and Restrictions on Transfer." As of June 15, 1999,
assuming the acquisition of the CNL Restaurant Businesses and giving effect to
a one-for-two reverse stock split effective as of June 3, 1999, APF had
43,498,464 shares of common stock outstanding and no preferred stock or excess
stock outstanding. Currently, there is no established public trading market
for the APF Shares. Upon consummation of the Acquisition, the APF Shares will
be listed on the NYSE under the symbol " ".
Holders of APF Shares are entitled to one vote per share on all matters to
be voted on by stockholders and are entitled to receive ratably such
distributions as may be declared on the APF Shares by the Board of Directors
in its discretion from funds legally available therefor. In the event of the
liquidation, dissolution or winding up of APF, holders of APF Shares are
entitled to share ratably in all assets remaining after payment of all debts
and other liabilities and any liquidation preference of any holders of
preferred stock. Holders of APF Shares have no subscription, redemption,
conversion or preemptive rights. Matters submitted for stockholder approval
generally require a majority vote of the shares present and voting thereon.
All of the APF Shares offered in the Acquisition will be fully paid and
nonassessable when issued.
Preferred Stock
Under APF's Articles of Incorporation, the Board of Directors may from time
to time establish and issue one or more series of preferred stock without
stockholder approval. The Board of Directors may classify or reclassify any
unissued preferred stock by setting or changing the number, designation,
preference, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms or conditions of
redemption of such series. Because the Board of Directors has the power to
establish the preferences and rights of each series of preferred stock, it may
afford the holders of any series of preferred stock preferences, powers and
rights, voting or otherwise, senior to the rights of holders of APF Shares.
For a description of the characteristics of the excess stock, which differ
from APF Shares and preferred stock in a number of respects, including voting
and economic rights, see "--Ownership Limits and Restrictions on Transfer,"
below.
Ownership Limits and Restrictions on Transfer
For APF to continue to qualify as a REIT under Section 856(a) of the
Internal Revenue Code of 1986, as amended, it must adhere to the following
ownership limits:
(a) not more than 50% in value of outstanding equity securities of all
classes may be owned, directly or indirectly, by five or fewer individuals,
as defined in the Code to include certain entities, during the last half of
a taxable year;
(b) the equity securities must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year; and
(c) APF must satisfy certain complex requirements with respect to the
nature of its income and assets.
For a description of these complex requirements, see "Federal Income Tax
Considerations" section starting on page 180 of this consent solicitation.
To ensure that five or fewer individuals do not own more than 50% in value
of the outstanding equity securities, APF's Articles of Incorporation provide
generally that no holder may own, or be deemed to own by
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virtue of certain attribution provisions of the Code, more than 9.8% of the
issued and outstanding equity securities, which we refer to as the Ownership
Limit. The Board of Directors, upon receipt of a ruling from the Internal
Revenue Service, an opinion of counsel, or other evidence satisfactory to the
Board of Directors, in its sole discretion, may waive or change, in whole or in
part, the application of the Ownership Limit with respect to any person that is
not an individual, as defined in Section 542(a)(2) of the Code. In connection
with any such waiver or change, the Board of Directors may require such
representations and undertakings from such person or affiliates and may impose
such other conditions, as the Board deems necessary, advisable or prudent, in
its sole discretion, to determine the effect, if any, of the proposed
transaction or ownership of equity securities on APF's status as a REIT for
federal income tax purposes.
In addition, the Board of Directors, from time to time, may increase the
Ownership Limit, except that (i) the Ownership Limit may not be increased and
no additional limitations may be created if, after giving effect thereto, APF
would be "closely held" within the meaning of Section 856(h) of the Code and
(ii) the Ownership Limit may not be increased to a percentage that is greater
than 9.8%. Prior to any modification of the Ownership Limit, the Board of
Directors will have the right to require such opinions of counsel, affidavits,
undertakings or agreements as it may deem necessary, advisable or prudent, in
its sole discretion, in order to determine or ensure APF's status as a REIT.
Under the Articles of Incorporation, the Ownership Limit will not be
automatically removed even if the REIT provisions of the Code are changed so
that they no longer contain any ownership concentration limitation or if the
ownership concentration limit is increased. In addition to preserving APF's
status as a REIT for federal income tax purposes, the Ownership Limit may
prevent any person or small group of persons from acquiring control of APF.
The Articles of Incorporation of APF also provide that if an issuance,
transfer or acquisition of equity shares (a) would result in a holder exceeding
the Ownership Limit, (b) would cause APF to be beneficially owned by less than
100 persons, (c) would result in APF being "closely held" within the meaning of
Section 856(h) of the Code or (d) would otherwise result in APF failing to
qualify as a REIT for federal income tax purposes, such issuance, transfer or
acquisition shall be null and void to the intended transferee or holder, and
the intended transferee or holder will acquire no rights to the shares.
Pursuant to the Articles of Incorporation, equity securities owned, transferred
or proposed to be transferred in excess of the Ownership Limit or which would
otherwise jeopardize APF's status as a REIT under the Code will automatically
be converted to excess stock.
A holder of excess stock is not entitled to distributions, voting rights and
other benefits with respect to such shares except the right to payment of the
purchase price for the shares and the right to certain distributions upon
liquidation. Any dividend or distribution paid to a proposed transferee on
excess stock pursuant to APF's Articles of Incorporation will be required to be
repaid to APF upon demand. Excess stock will be subject to repurchase by APF at
its election. The purchase price of any excess stock will be equal to the
lesser of (1) the price in such proposed transaction or (2) either:
. if the shares are then listed on the NYSE, the fair market value of such
shares reflected in the average closing sales prices for the shares on
the 10 trading days immediately preceding the date on which APF or its
designee determines to exercise its repurchase right;
. if the shares are not then so listed, such price for the shares on the
principal exchange, including the Nasdaq National Market, on which such
shares are listed;
. if the shares are not then listed on a national securities exchange, the
latest quoted price for the shares;
. if not quoted, the average of the high bid and low asked prices if the
shares are then traded over-the-counter, as reported by the Nasdaq Stock
Market;
. if such system is no longer in use, the principal automated quotation
system then in use;
. if the shares are not quoted on such system, the average of the closing
bid and asked prices as furnished by a professional market maker making a
market in the shares; or
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. if there is no such market maker or such closing prices otherwise are
unavailable, the fair market value, as determined by the Board of
Directors in good faith, on the last trading day immediately preceding
the day on which notice of such proposed purchase is sent by APF.
The Articles of Incorporation also established certain restrictions relating
to transfers of any excess stock that may be issued. If such transfer
restrictions are determined to be void or invalid by virtue of any legal
decision, statute, rule or regulation, then APF will have the option to deem
the intended transferee of any excess stock to have acted as an agent on behalf
of APF in acquiring such excess stock and to hold such excess stock on behalf
of APF.
Under the Articles of Incorporation, APF has the authority at any time to
waive the requirement that excess stock be issued or be deemed outstanding in
accordance with the provisions of the Amended and Restated Articles of
Incorporation if, in the opinion of nationally recognized tax counsel, the
issuance of such excess stock or that such excess stock are deemed to be
outstanding jeopardizes the status of APF as a REIT for federal income tax
purposes.
All certificates issued by APF representing equity securities will bear a
legend referring to the restrictions described above.
The Articles of Incorporation of APF also provides that all persons who own,
directly or by virtue of the attribution provisions of the Code, more than 5%
of the outstanding equity securities or such lower percentage as may be set by
the Board of Directors, must file an affidavit with APF containing information
specified in the Articles of Incorporation no later than January 31st of each
year. In addition, each stockholder, upon demand, shall be required to disclose
to APF in writing such information with respect to the direct, indirect and
constructive ownership of shares as the directors deem necessary to comply with
the provisions of the Code, as applicable to a REIT, or to comply with the
requirements of an authority or governmental agency.
The ownership limitations described above may have the effect of precluding
acquisitions of control of APF by a third party.
Registrar and Transfer Agent
The Registrar and Transfer Agent for the APF Shares is .
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DESCRIPTION OF THE NOTES
The notes will be issued under the indenture between APF and , as
trustee. A copy of the form of indenture is filed as an exhibit to the
Registration Statement of which this consent solicitation is a part. The terms
of the notes include those provisions contained in the indenture and those made
part of the indenture by reference to the Trust Indenture Act of 1939, as
amended. The notes are subject to all such terms, and, if you are to be a
holder of notes, we refer you to the indenture and the Trust Indenture Act for
a statement thereof. As used in this section, the term APF means APF and all of
its subsidiaries, unless otherwise expressly stated or the context otherwise
requires.
General Terms of the Notes
The following summary of certain provisions of the indenture does not
purport to be complete and is subject to and qualified in its entirety by
reference to the indenture:
. A separate series of notes will be issued pursuant to the indenture to
Limited Partners of each Income Fund who elect to receive notes in
exchange for their units in connection with the Acquisition. The terms of
each series of notes will be substantially identical.
. The notes will be direct, unsecured and unsubordinated obligations of APF
and will rank equally with each other and with all other unsecured and
unsubordinated indebtedness of APF from time to time outstanding. The
notes will be subordinated to mortgages and other secured indebtedness of
APF to the extent of the value of the property securing such
indebtedness. The notes also will be subordinated to all existing secured
and future third party secured indebtedness and other liabilities of APF.
As of March 31, 1999, on a pro forma basis assuming APF had acquired all
of the Income Funds and the CNL Restaurant Businesses, APF would have had
aggregate secured consolidated debt of approximately $227 million, to
which the notes were subordinated or which ranked equal with such notes.
. APF will have the sole responsibility of paying interest on the notes and
repaying the principal amount due at their maturity. No other person,
including the stockholders of APF, will have any liability with respect
to the notes.
. The notes will mature on , 2004 which is approximately five years
following the currently expected date that the Acquisition will be
completed.
. The notes are not subject to any sinking fund provisions. This means that
APF is not required to make periodic payments to a custodial account for
the purpose of accumulating the cash necessary to repay the notes at
their maturity date.
. Except as described under "--Limitation on Incurrence of Debt" and "--
Merger, Consolidation or Sale," the indenture does not contain any other
provisions that would limit the ability of APF to incur indebtedness or
that would afford holders, as defined below, of the notes protection in
the event of:
1. a highly leveraged or similar transaction involving APF or the
management of APF, such as a leveraged buy-out;
2. a change of control of APF; or
3. a reorganization, restructuring, merger or similar transaction
involving APF that may adversely affect the holders of the notes.
. In addition, subject to the limitations set forth under "--Merger,
Consolidation or Sale," APF may in the future enter into certain
transactions such as the sale of all or substantially all of its assets
or the merger or consolidation of APF that would increase the amount of
APF's indebtedness or substantially reduce or eliminate APF's assets,
which may have an adverse effect on APF's ability to service its
indebtedness, including the notes. APF and its management have no present
intention of engaging in a highly leveraged or similar transaction
involving APF.
. The notes will be issued in fully registered form. This means that for
each Limited Partner who elects to receive notes, such Limited Partner
will be issued a note in his, her or its name. In the event that a
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Limited Partner wishes to transfer the note, the Limited Partner will be
required to produce the note prior to transfer and endorse the note over
to the transferee in the manner required by the transferee.
. The notes will not be convertible into or exchangeable for any capital
stock of APF.
Principal Amount of the Notes and the Repayment thereof
The principal amount of the notes with respect to each Income Fund will be
equal to 97% of the APF Share consideration that your Income Fund would have
otherwise received, based on the exchange value, up to a maximum of 15% of the
aggregate APF Share consideration paid to the Income Fund.
The principal of each note payable on the maturity date will be paid against
presentation and surrender of such note at an office or agency of a paying
agent that will be maintained by APF in New York City in United States dollars.
Initially, the indenture trustee will act as paying agent.
Interest Rate
The following discussion sets forth the interest rate payable with respect
to the notes and the dates upon which interest will be paid:
. The notes will bear interest at a fixed rate of interest equal to 7.0%
per annum.
. Limited Partners who hold notes will begin earning interest on the notes
on the date the Acquisition is consummated.
. APF will pay interest on the notes semi-annually in arrears on each June
15 and December 15, commencing June 15, 2000 of which we refer to as each
an interest payment date, and on the maturity date.
. Interest will be paid to the persons in whose names the notes are
registered in the security register for the notes at the close of
business on June 1, for interest to be paid on June 15, and December 1,
for interest to be paid on December 15, regardless of whether such day is
a business day, as defined in the indenture.
. If any interest payment date falls on a day that is not a business day,
payment will be made on the next business day and no additional interest
will be paid.
. Interest payments will be in the amount of interest accrued to, but
excluding, each June 15 and December 15.
.Interest on the notes will be computed on the basis of a 360-day year of
twelve 30-day months.
Redemption
The notes of any series may be redeemed at any time at the option of APF, in
whole or in part, at a redemption price equal to the sum of the principal
amount of the notes being redeemed plus accrued interest thereon to the
redemption date, or the redemption price.
If the paying agent, other than APF or an affiliate thereof, holds, on the
redemption date of any notes, money sufficient to pay such notes, then on and
after that date such notes will cease to be outstanding and interest on them
will cease to accrue.
Notice of any optional or mandatory redemption of any notes will be given to
holders at their addresses, as shown in the security register for the notes,
not more than 60 nor less than 30 days prior to the date fixed for redemption.
The notice of redemption will specify, among other items, the redemption price
and the principal amount of the notes held by such holder to be redeemed.
If less than all the notes of any series are to be redeemed, the indenture
trustee shall select the notes to be redeemed in whole or in part.
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Proceeds from Sale of Restaurant Properties Formerly Owned by the Income Funds
In the event that, following the closing of the Acquisition, APF sells or
otherwise disposes of any restaurant property owned by an Income Fund
immediately prior to the Acquisition and realizes net cash proceeds, in excess
of:
. the amount required to repay mortgage indebtedness outstanding
immediately prior to the Acquisition secured by such restaurant property
or otherwise required to be applied to the reduction of indebtedness of
APF; and
. the costs incurred by APF in connection with such sale or other
disposition,
APF will be required within 90 days of the receipt of the total net cash
proceeds to redeem at the redemption price an aggregate amount of principal of
the particular series of the notes which were issued to the holders who were
Limited Partners of such Income Fund prior to the Acquisition equal to 80% of
such net cash proceeds.
Proceeds from Refinancings of Restaurant Properties Formerly Owned by the
Income Funds
In the event that, following the closing of the Acquisition, APF refinances,
whether at maturity or otherwise, any indebtedness secured by any restaurant
property owned by an Income Fund immediately prior to the Acquisition and
realizes net cash proceeds in excess of:
. the amount of indebtedness secured by such restaurant property at the
time of the Acquisition, calculated prior to any repayment or other
reduction in the amount of such indebtedness in the Acquisition; and
. the costs incurred by APF in connection with such refinancing,
APF will be required within 90 days of the receipt of the total net cash
proceeds to redeem at the redemption price an aggregate amount of principal of
the particular series of the notes which were issued to the holders who were
Limited Partners of such Income Fund prior to the Acquisition equal to 80%
ofsuch net cash proceeds.
Limitation on Incurrence of Indebtedness
Pursuant to the terms of the indenture, APF will not, and will not permit
any of its subsidiaries to, incur any indebtedness, including indebtedness that
is acquired as the result of acquisitions, other than intercompany indebtedness
that is subordinate in right of payment to the notes, if immediately after
giving effect to the incurrence of such indebtedness, the aggregate principal
amount of all outstanding indebtedness of APF and its subsidiaries on a
consolidated basis, determined in accordance with GAAP, is greater than 75% of
APF's total assets, as defined below.
As used in the description of the indenture included here:
"subsidiary" means (i) a corporation, partnership, limited liability
company, trust, REIT or other entity a majority of the voting power of the
voting equity securities of which are owned, directly or indirectly, by APF or
by one or more subsidiaries of APF, (ii) a partnership, limited liability
company, trust, REIT or other entity not treated as a corporation for federal
income tax purposes, a majority of the equity interests of which are owned,
directly or indirectly, by APF or a subsidiary of APF or (iii) one or more
corporations which, either individually or in the aggregate, would be
"significant subsidiaries" (as defined below, except that the investment, asset
and equity thresholds for purposes of this definition shall be 5%), the
majority of the value of the equity interests of which are owned, directly or
indirectly, by APF or by one or more subsidiaries.
"total assets" means the sum of (i) undepreciated real estate assets and
(ii) all other assets, excluding intangibles, of APF and its subsidiaries
determined on a consolidated basis. The accounts of subsidiaries shall be
consolidated with those of APF only to the extent of APF's proportionate
interest therein.
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"undepreciated real estate assets" means, as of any date, the cost, being
the original cost to APF or any of its subsidiaries plus capital improvements,
of real estate assets of APF and its subsidiaries on such date, before
depreciation and amortization of such real estate assets, determined on a
consolidated basis. The accounts of subsidiaries shall be consolidated with
those of APF only to the extent of APF's proportionate interest therein.
Merger, Consolidation or Sale
APF will not merge or consolidate with or into, or sell, lease, convey,
transfer or otherwise dispose of all or substantially all of its property and
assets as an entirety or substantially as an entirety in one transaction or a
series of related transactions to any individual, corporation, limited
liability company, partnership, joint venture, association, joint stock
company, trust, REIT, unincorporated organization or government or any agency
or political subdivision thereof (any such entity, a "person"), or permit any
person to merge with or into APF, unless:
. either APF shall be the continuing person or the person, if other than
APF, formed by such consolidation or into which APF is merged or that
acquired such property and assets of APF shall be an entity organized and
validly existing under the laws of the United States of America or any
state or jurisdiction thereof and shall expressly assume, by a
supplemental indenture, executed and delivered to the indenture trustee,
all of the obligations of APF, on the notes and under the indenture;
. immediately after giving effect, on a pro forma basis, to such
transaction, no default or event of default, as described below, shall
have occurred and be continuing; and
. APF will have delivered to the indenture trustee an officers' certificate
and an opinion of counsel, in each case stating that such consolidation,
merger or transfer and such supplemental indenture complies with such
conditions.
Events of Default, Notice and Waiver
The following events are "events of default" with respect to the notes of
any series:
. default for 30 days in the payment of any installment of interest on any
note of such series;
. default in the payment of the principal of any note when due and payable
at maturity, redemption, by acceleration or otherwise;
. default in the payment of any mandatory redemption of principal on or
before the date 90 days after the receipt of the total net cash proceeds
from the applicable sale or other disposition or refinancing of a
restaurant property giving rise to the obligation to make such
redemption;
. default in the performance of any other covenant or agreement of APF
contained in the indenture, such default having continued for 60 days
after written notice as provided in the indenture; and
. certain events of bankruptcy, insolvency or reorganization, or court
appointment of a receiver, liquidator, assignee or trustee of APF or any
significant subsidiary or any of their respective property. The term
"significant subsidiary" means any subsidiary which is a "significant
subsidiary" of APF as defined by Regulation S-X promulgated under the
Securities Act.
If an event of default under the indenture occurs and is continuing, then in
every such case other than a bankruptcy-related event of default as described
above, in which case the principal amount of the notes shall become immediately
due and payable, the indenture trustee or the holders of not less than 25% in
principal amount of the outstanding notes of any series may declare the
principal amount of all of the notes of any series to be due and payable
immediately by written notice thereof to APF and to the indenture trustee if
given by the holders. However, at any time after such a declaration of
acceleration with respect to any series of notes has been made, but before a
judgment or decree for payment of the money due has been obtained by the
indenture trustee, the holders of not less than a majority of the principal
amount of outstanding notes of any series may cancel such declaration and its
consequences if:
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. APF shall have paid or deposited with the indenture trustee all required
payments of the principal of and interest on the notes of any series,
plus certain fees, expenses, disbursements and advances of the indenture
trustee; and
. all events of default, other than the nonpayment of accelerated principal
of, or specified portion thereof, and interest on the notes have been
cured or waived.
The indenture provides that the holders of not less than a majority of the
principal amount of the outstanding notes of a series may waive any past
default with respect to such series and its consequences, except a default:
. in the payment of the principal of or interest on any note; or
. in respect of a covenant or provision contained in the indenture that
cannot be modified or amended without the consent of the holder of each
outstanding note affected thereby.
The indenture trustee will be required to give notice to the holders of
notes within 90 days of a default under the indenture unless such default has
been cured or waived. The indenture trustee may withhold notice to the holders
of any default, except a default in the payment of the principal of or interest
on any note or in the payment of any mandatory redemption installment in
respect of any note, if it determines in good faith such withholding to be in
the interest of such holders.
The indenture provides that no holders of notes may institute any
proceeding, judicial or otherwise, with respect to the indenture or for the
appointment of a receiver or trustee, or for any other remedy thereunder,
except in the case of failure of the Indenture Trustee, for 60 days, to act
after it has received a written request to institute proceedings in respect of
an event of default from the holders of not less than 25% in principal amount
of the outstanding notes, as well as an offer of indemnity reasonably
satisfactory to it. This provision will not prevent, however, any holder of
notes from instituting suit for the enforcement of payment of the principal of
and interest on such notes at the respective due dates thereof.
Subject to provisions in the indenture relating to its duties in case of
default, the indenture trustee shall be under no obligation to exercise any of
its rights or powers under the indenture at the request, order or direction of
any holders of any outstanding notes under the indenture, unless such holders
offer the indenture trustee reasonable indemnity. The holders of a majority in
principal amount of the outstanding notes shall have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the indenture trustee, or of exercising any trust or power conferred upon the
indenture trustee.
Within 120 days after the close of each fiscal year, APF must deliver to the
indenture trustee a certificate, signed by one of several specified officers of
APF, stating whether or not such officer has knowledge of any default under the
indenture and, if so, specifying each such default and the nature and status
thereof.
Modification of the Indenture
Modifications and amendments of the indenture will be permitted to be made
by APF and the indenture trustee without the consent of any holder of notes for
any of the following purposes:
. to cure any ambiguity, defect or inconsistency in the indenture;
. to evidence the succession of another person to APF as obligor under the
indenture;
. to permit or facilitate the issuance of the notes in uncertificated form;
. to make any change that does not adversely affect the rights of any
holder of notes;
. to provide for the issuance of and establish the form and terms and
conditions of the notes of any series as permitted by the indenture;
. to add to the covenants of APF or to add events of default for the
benefit of holders or to surrender any right or power conferred upon APF
in the indenture;
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. to evidence and provide for the acceptance of appointment by a successor
indenture trustee or facilitate the administration of the trusts under
the indenture by more than one indenture trustee;
. to provide for guarantors or collateral for the notes of any series; or
. to comply with requirements of the SEC in order to effect or maintain the
qualification of the indenture under the Trust Indenture Act.
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COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by the Income Funds to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure which will be in effect after the Acquisition had been
in effect during the years presented below.
Under the partnership agreements, we and our affiliates are entitled to
receive fees in connection with managing the affairs of each Income Fund. The
partnership agreements also provide that we are to be reimbursed for our
expenses for services performed for each Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. As part of the Acquisition, all
participating Income Funds will share in the overall cost of managing the
consolidated portfolio of restaurant properties owned by APF. As stockholders
of APF, you and the other former Limited Partners of the Income Funds will
receive distributions in proportion with your ownership of APF Shares. This
cost participation and dividend payment are in lieu of the payments to us
discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the quarter
ended March 31, 1999, the aggregate amounts accrued or actually paid by the
Income Funds to us are shown below under "Historical" and the estimated amounts
of compensation that would have been paid had the Acquisition been in effect
for the periods presented, are shown below under "Pro Forma":
<TABLE>
<CAPTION>
Quarter
Year Ended December 31, Ended
-------------------------------- March 31,
1996 1997 1998 1999
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Historical:
General Partner Distributions..... $ -- $ -- $ -- $ --
Accounting and Administrative
Services......................... 1,444,245 1,347,490 1,508,413 407,106
Broker/Dealer Commissions......... -- -- -- --
Due Diligence and Marketing
Support Fees..................... -- -- -- --
Acquisition Fees.................. -- -- -- --
Asset Management Fees............. 226,329 226,547 226,177 55,198
Real Estate Disposition Fees (1).. 75,750 15,150 230,013 --
---------- ---------- ---------- --------
Total historical................ $1,746,324 $1,589,187 $1,964,603 $462,304
========== ========== ========== ========
Pro Forma:
Cash Distributions on APF Shares.. $ 171,923 $ 158,859 $ 258,994 $ 60,185
Salary Compensation............... -- -- -- --
---------- ---------- ---------- --------
Total pro forma................. $ 171,923 $ 158,859 $ 258,994 $ 60,185
========== ========== ========== ========
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to certain minimum
returns to the Limited Partners. To date, no such fees have been paid since
the required minimum returns have not been made to the Limited Partners.
If you would like more detailed information regarding our compensation and
distributions on a pro forma and historical basis for each Income Fund, please
read the supplement for your Income Fund under the heading "Compensation,
Reimbursements and Distributions to the General Partners."
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FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the material federal income tax issues associated
with the Acquisition was prepared by Shaw Pittman, counsel to APF, and is based
upon the laws, regulations, and reported judicial and administrative rulings
and decisions in effect as of the date of this consent solicitation, all of
which are subject to change, retroactively or prospectively, and to possibly
differing interpretations. This discussion does not purport to deal with all of
the federal income or other tax consequences applicable to you in light of your
particular investment or other circumstances.
APF has not requested a ruling from the Internal Revenue Service or any
other tax authority on the federal, state or local tax considerations relevant
to the operation of APF, the Acquisition, or the ownership or disposition of
APF Shares or notes. Shaw Pittman has rendered certain opinions discussed
herein and believes that if the IRS were to challenge their conclusions, the
conclusions should prevail in court. Opinions of counsel are not binding on the
IRS or on the courts, however, and we cannot predict whether the conclusions
reached by Shaw Pittman would be sustained in court.
You should consult your own tax advisor in determining the federal, state,
local, foreign and other tax consequences to you of the receipt, ownership, and
disposition of APF Shares or notes, the tax treatment of a REIT, and potential
changes in applicable tax laws.
Certain Tax Differences between the Ownership of Units and APF Shares
If your Income Fund is acquired by APF and you have voted in favor of the
Acquisition, you will receive APF Shares. If you have voted against the
Acquisition but your Income Fund is acquired by APF, you may elect to receive
notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Because each Income Fund is a partnership for
federal income tax purposes, it is not subject to taxation. Currently, as a
Limited Partner, you must take into account your distributive share of all
income, loss and separately stated partnership items, regardless of the amount
of any distributions of cash to you. Your Income Fund supplies that information
to you annually on a Schedule K-1. The character of the income that you
recognize depends upon the assets and activities of your Income Fund and may,
in some circumstances, be treated as income which may be offset by any losses
you may have from passive activities.
In contrast to your treatment as a Limited Partner, as a stockholder of APF
you will be taxed based on the amount of distributions you receive from APF.
Each year APF will send you a Form 1099-DIV reporting the amount of taxable and
nontaxable distributions paid to you during the preceding year. The taxable
portion of these distributions depends on the amount of APF's earnings and
profits. Because the Acquisition is a taxable transaction, APF's tax basis in
the acquired restaurant properties will be higher than the Income Funds' tax
basis had been in the same properties. At the same time, however, APF may be
required to utilize a slower method of depreciation with respect to certain
restaurant properties than that used by the Income Funds. As a result, APF's
tax depreciation from the acquired restaurant properties will differ from the
Income Funds' tax depreciation. Accordingly, under certain circumstances, even
if APF were to make the same level of distributions as your Income Fund, a
different portion of the distributions could constitute taxable income to you.
In addition, the character of this income to you as a stockholder of APF does
not depend on its character to APF. The income will generally be ordinary
dividend income to you and will be classified as portfolio income under the
passive loss rules, except with respect to capital gains dividends, discussed
below. Furthermore, if APF incurs a taxable loss, the loss will not be passed
through to you. For certain other differences attributable to APF's status as a
REIT, see "--Taxation of APF" and "--Taxation of Stockholders--Taxable Domestic
Stockholders" below.
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Tax Consequences of the Acquisition
Tax Consequences of Your Income Fund's Transfer of Assets to APF. If your
Income Fund is acquired by APF, your Income Fund will be merged with and into
the Operating Partnership. For federal income tax purposes, the merger of your
Income Fund and the Operating Partnership will be treated as though your Income
Fund transferred all of its assets and liabilities to APF in exchange for APF
Shares and notes, if you or any other Limited Partners in your Income Fund
elect to receive notes. Your Income Fund will then be treated as though it
liquidated and distributed the notes to the Limited Partners electing to
receive notes and the APF Shares to the remaining Limited Partners.
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one or more individuals or entities in exchange for the stock of that
corporation, and (2) immediately after the exchange, such individuals or
entities are in control of the corporation. For purposes of section 351(a),
control is defined as the ownership of stock possessing at least 80% of the
total combined voting power of all classes of stock entitled to vote and at
least 80% of the total number of shares of all other classes of stock of the
corporation. APF has represented to Shaw Pittman that, following the
Acquisition, the Limited Partners of the Income Funds will not own stock
possessing at least 80% of the total combined voting power of all classes of
APF stock entitled to vote and at least 80% of the total number of shares of
all other classes of APF stock. Based upon this representation, Shaw Pittman
has opined that the Acquisition will not result in the acquisition of control
of APF by the Limited Partners for purposes of section 351(a). Accordingly, the
transfer of assets will result in recognition of gain or loss by each Income
Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if any,
assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or any other Limited Partners
in your Income Fund elect the notes, your Income Fund will receive APF Shares
and notes in exchange for your Income Fund's assets. Because the principal
portion of the notes will not be due until , 2004, the acquisition of your
Income Fund's assets, in part, in exchange for notes will be reported under the
installment sales method and a portion of your Income Fund's gain may be
deferred under the "installment sale" rules. Pursuant to this method, and
assuming that none of the principal amount of the notes is collected in the
year of the Acquisition, the amount of gain recognized by your Income Fund in
the year of the Acquisition will be equal to value of the APF Shares received
by your fund multiplied by the ratio that the gross profit realized by your
Income Fund in the Acquisition bears to the total contract price for your
Income Fund's assets. To the extent your Income Fund realizes depreciation
recapture income under section 1245 or section 1250 of the Code, the recapture
income will also be recognized by your Income Fund in the year of the
Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares and notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231
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gains and losses that you recognize in that year. If the result is a net loss,
such loss is characterized as an ordinary loss. If the result is a net gain, it
is characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report its allocable
share of such gain, if any, pursuant to these terms, regardless of the Limited
Partner's decision to receive notes rather than APF Shares. Even though a
Limited Partner's election of the notes may decrease the amount of gain your
Income Fund recognizes, the electing Limited Partner still will be required to
take into account his, her or its share of the Income Fund's gain as determined
under the partnership agreement. Therefore, Limited Partners who elect the
notes may recognize gain in the year of the Acquisition despite the fact that
they will not receive cash with which to pay the tax on the gain. Such Limited
Partners will adjust the basis of the notes as described below, and the
resulting increase in basis will decrease the amount of the gain recognized
over the term of the notes by the Limited Partners electing to receive notes.
See "Liquidation and Termination of Your Income Fund."
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed the APF Shares or the notes, as the case may be, to
you. The taxable year of your Income Fund will end at such time, and you must
report, in your taxable year that includes the date of the Acquisition, your
share of all income, gain, loss, deduction and credit for your Income Fund
through the date of the Acquisition including your gain or loss resulting from
the Acquisition. If your taxable year is not the calendar year, you could be
required to recognize as income in a single taxable year your share of your
Income Fund's income attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of the Income Funds,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units, and your holding period
for the notes for purposes of determining capital gain or loss from the
disposition of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold Units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employees'
beneficiary association, supplemental unemployment benefit trust or qualified
group legal services plan as described in sections 501(c)(7), (9), (17) or (20)
of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
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Treatment of Noteholders
Stated Interest. If you receive notes in the Acquisition, under general
principles of the Code, you must include stated interest in income in
accordance with your method of tax accounting. Accordingly, if you use the
accrual method of tax accounting, you must include stated interest in income as
it accrues, and if you use the cash method of tax accounting, you must include
stated interest in income as it is actually or constructively received.
Payments of interest income to you will constitute portfolio income, not
passive activity income for purposes of section 469 of the Code. Accordingly,
such income will not be subject to reduction by your losses from passive
activities if you are subject to the passive activity loss rules. Income
attributable to interest payments may be offset by investment expense
deductions, however, subject to the limitation that, if you are an individual
investor, you may only deduct miscellaneous itemized deductions, including
investment expenses, to the extent such deductions exceed two percent of your
adjusted gross income.
Receipt of Principal. Noteholders will recognize gain or loss when APF makes
payments of principal under the notes. The amount of gain or loss recognized at
the time the principal payments are made will be equal to the difference
between the amount of the principal payments and the noteholder's basis in the
notes. If, however, the notes are redeemed in part prior to the maturity date,
the amount of gain or loss recognized at the time the principal payments are
made will be equal to the difference between the amount of the principal
payments made and a proportionate amount of the noteholder's basis in the
notes. To the extent a noteholder's adjusted tax basis in his or her notes is
greater than the face amount of the notes, the excess should be treated as a
capital loss upon the retirement or maturity of the notes.
Disposition of Notes. In general, if you are a holder of notes, you will
recognize gain or loss upon the sale, exchange, redemption or other taxable
disposition of a note measured by the difference between:
. the amount of cash and the fair market value of property received,
except, for cash method taxpayers, to the extent attributable to the
payment of accrued interest, and
. your tax basis in the note.
Any such gain or loss will generally be long-term capital gain or loss,
provided the note was a capital asset in your hands and was held for more than
one year.
If the face amount of the notes that you hold at the end of the taxable
year, together with any other installment obligations that you receive during
the year, exceeds $5,000,000, you may be required to pay to the IRS interest at
the federal underpayment rate based on a portion of the tax liability that you
have deferred.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date of the Acquisition. The
basis of the restaurant properties received by APF from the Income Funds will
equal the fair market value of the APF Shares, plus the issue price of the
notes issued in the Acquisition, plus the amount of any liabilities of the
Income Funds assumed by APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property will
differ from the Income Fund's basis therein, and the restaurant properties will
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds.
Tax Issues Relating to Foreign Limited Partners. The rules governing U.S.
federal income taxation of nonresident alien individuals and foreign entities
are complex, and we will not try here to provide more than a brief summary of
certain rules relating to the Acquisition. If you are a foreign Limited
Partner, you should
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consult your tax advisors to determine the impact of the Acquisition under the
tax laws applicable to you, including any reporting requirements.
The Foreign Investment in Real Property Tax Act of 1980 introduced special
rules applicable to foreign investors in United States real property and
partnerships owning United States real property. FIRPTA generally subjects
foreign investors to United States taxation at regular United States rates on
the gain from the sale by such foreign investors of United States real property
interests, which include (1) United States real estate and (2) interests in
partnerships and some other entities, holding United States real estate. FIRPTA
also imposes withholding on such sales.
Under section 702(b) of the Code, the character of an item included in a
partner's distributive share of gain is determined as if the partner, rather
than the partnership, realized the item from the source. Therefore, if a
partnership sells a United States real property interest, FIRPTA should apply
as if the foreign partner had sold the United States real property interest
directly. APF, based on the advice of Shaw Pittman, believes that substantially
all of the assets in the Income Funds consist of United States real property
interests. Accordingly, you should take into account your distributive share of
any gain or loss recognized by your Income Fund on its disposition of the
United States real property interests in the Acquisition. Consequently, you
will be subject to tax upon your distributive share of any such gain.
Section 1446 requires partnerships to withhold at a 39.6% rate with respect
to noncorporate foreign partners and a 35% rate with respect to corporate
foreign partners on "effectively connected taxable income" allocable to foreign
partners. A foreign partner's distributive share of the income from a
disposition of a United States real property interest is subject to withholding
under section 1446 because FIRPTA characterizes such gain as effectively
connected taxable income. Any amounts withheld with respect to the distributive
share of a foreign partner are treated as a credit against the tax liability of
such partner for the taxable year to which the withholding relates. Withheld
amounts are treated as a distribution on the last day of the partnership
taxable year for which the withheld amount was paid, or, if earlier, on the
last day on which the partner owned an interest in the partnership.
To satisfy the above withholding obligation with respect to the Acquisition,
your Income Fund may retain and place the APF Shares or notes to be received by
any foreign Limited Partner in an escrow account pending either (1) a sale of a
portion of the APF Shares or notes sufficient to satisfy the withholding
requirement or (2) the receipt of an amount of cash from such foreign Limited
Partner sufficient to satisfy the withholding requirement.
Taxation of APF
General. APF has elected to be taxed as a REIT for federal income tax
purposes, as defined in sections 856 through 860 of the Code, commencing with
its taxable year ending December 31, 1995. APF believes that it is organized
and will operate so as to continue to qualify as a REIT. We cannot predict,
however, whether APF will continue to succeed in qualifying as a REIT. The
provisions of the Code pertaining to REITs are highly technical and complex.
Accordingly, we urge you to review with your tax advisor this summary, the
applicable Code sections, rules and regulations issued thereunder, and
administrative and judicial interpretations thereof.
If APF qualifies to be treated as a REIT for federal income tax purposes, it
generally will not be subject to federal corporate income tax on net income
that is currently distributed to APF stockholders. This treatment substantially
eliminates the "double taxation" that is imposed at the corporate level when
earned and once again at the stockholder level when distributed and that
generally results from investments in a corporation.
Certain Corporate Level Taxation. Regardless of whether APF qualifies as a
REIT, APF will be subject to federal income tax in the following circumstances:
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. APF will be taxed at regular corporate rates on any undistributed real
estate investment trust taxable income, including undistributed net
capital gains.
. Under certain circumstances, APF may be subject to the alternative
minimum tax on its items of tax preference.
. If APF has net income from foreclosure property, which is real property
and related personal property acquired as a result of default on a lease
of or on a loan secured by the property, APF will be subject to tax on
this income at the highest corporate rate.
. If APF has net income derived from a prohibited transaction, which is a
sale or other disposition of property other than foreclosure property
that is held primarily for sale to customers in the ordinary course of
business, this income will be subject to a 100% tax.
. If APF should fail to satisfy the 75% gross income test or the 95% gross
income test, but has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a
100% tax on the net income attributable to the greater of the amount by
which it fails the 75% or 95% test.
. If, during any calendar year, APF fails to distribute at least the sum of
(1) 85% of its real estate investment trust ordinary income for such
year,
(2) 95% of its real estate investment trust capital gain net income for
such year, and
(3) any undistributed taxable income from prior periods
APF will be subject to a four percent excise tax on the excess of the
required distribution over the amounts actually distributed.
. If APF acquires an asset from a C-corporation in a transaction, and
recognizes gain on the disposition of the asset during the 10-year period
beginning on the date on which APF acquired the asset, then, assuming APF
makes an election pursuant to IRS Notice 88-19, to the extent of the
excess of the fair market value of the property at the time of
acquisition by APF over the adjusted basis in the property at such time,
this gain will be subject to tax at the highest regular corporate rate.
If APF fails to qualify as a REIT for any taxable year and certain relief
provisions do not apply, APF will be subject to federal income tax on its
taxable income at regular corporate rates. To the extent that APF would be
subject to tax liability for any taxable year, the amount of cash available for
satisfaction of its liabilities and for distribution to its stockholders would
be reduced. In addition, if APF fails to qualify as a REIT, distributions made
to you, as a stockholder of APF, generally would be taxable as ordinary income
to the extent of current and accumulated earnings and profits and, subject to
certain limitations, some corporate investors would be eligible for the
corporate dividends received deduction. However, we cannot guarantee that any
such distributions would be made. APF would not be eligible to elect REIT
status for the four taxable years after the taxable year it failed to qualify
as a REIT, unless its failure to qualify was due to reasonable cause and not
willful neglect and certain other requirements were satisfied.
Requirements for Qualification. As discussed more fully below, the Code
defines a REIT as a corporation, trust or association that:
. is managed by one or more trustees or directors;
. uses transferable shares or transferable certificates to evidence
beneficial ownership;
. would be taxable as a domestic corporation, but for the REIT provisions
of the Code;
. is neither a financial institution nor an insurance company;
. has at least 100 persons as beneficial owners;
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. is not closely held as defined in section 856(h) of the Code; and
. satisfies certain other tests that are described below regarding the
nature of its assets and income and the amount of its distributions.
In the case of a REIT that is a partner in a partnership, the Treasury
Regulations deem that the REIT owns its proportionate share of the assets of
the partnership and is entitled to the income of the partnership attributable
to its proportionate share. In addition, the assets and gross income of the
partnership attributed to the REIT retain the same character as in the hands of
the partnership for purposes of satisfying the gross income tests and the asset
tests described below. Thus, APF's proportionate share of the assets,
liabilities and items of income of the Operating Partnership will be treated as
assets, liabilities and items of income of APF for purposes of applying the
asset and gross income tests described below.
Income Tests. In order for APF to qualify as a REIT, there are currently two
requirements relating to APF's gross income that must be satisfied annually.
First, at least 75% of APF's gross income for each taxable year must consist of
temporary investment income or of certain defined categories of income derived
directly or indirectly from investments relating to real property or the
mortgages on real property. Subject to various limitations, these categories
include:
. rents from real property,
. interest on mortgages on real property,
. gain from the sale or other disposition of real property, interests in
real property and in mortgages on real property which are not primarily
held for sale to customers in the ordinary course of business,
. income from foreclosure property, and
. amounts received as consideration for entering into either loans secured
by real property or purchases or leases of real property.
Second, at least 95% of APF's gross income for each taxable year must be
derived either from income qualifying under the 75% test or from dividends,
other types of interest and gain from the sale or disposition of stock or
securities, or from any combination of the foregoing. Gross income from
prohibited transactions is excluded for purposes of determining gross income
for the 75% and 95% tests.
For each taxable year before 1998, APF was required to satisfy an additional
gross income test. This test required that gain from the sale or other
disposition of stock or securities held for less than one year, gain from
prohibited transactions and gain on the sale or other disposition of real
property held for less than four years, excluding involuntary conversions and
sales of foreclosure property represent less than 30% of APF's gross income for
such taxable year. Gross income from prohibited transactions was included for
purposes of determining gross income for the 30% test.
APF believes that it satisfied all three of these income tests for 1995,
1996 and 1997. APF also believes that it satisfied the two current tests for
1998 and expects to satisfy both tests for 1999 and subsequent taxable years.
Much of APF's income will be derived from rent from the restaurant
properties. All of the rent from the restaurant properties will qualify as
"rents from real property" in satisfying the two gross income tests only if the
following conditions are met:
. First, the rent must not be based on the income or profits of any person.
However, an amount generally will be treated as "rents from real
property" if it is based on a fixed percentage or percentages of receipts
or sales.
. Second, APF, or a direct or indirect owner of 10% or more of APF, may not
own, directly or constructively, 10% or more of a tenant.
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. Third, if rent attributable to personal property leased in connection
with a lease of real property may not exceed 15% of the total rent
received under the lease.
. Finally, APF generally must not operate or manage the property or furnish
or render services to the tenants of such property.
APF has represented to Shaw Pittman that it will not violate any of the four
conditions specified above. Specifically, APF expects that a substantial
majority of its income will be derived from leases of the type described in
"APF's Business and the Restaurant Properties--The Restaurant Properties--
Financial Products and Services--Description of Leases," and it does not expect
such leases to generate income that would not qualify as rents from real
property for purposes of the 75% and 95% income tests.
In addition, APF will be paid interest on mortgage loans. All interest
income qualifies under the 95% gross income test. All the interest on each
mortgage loan will also qualify under the 75% gross income test if the loan is
secured by real property and if the amount of the loan did not exceed the fair
market value of the real property at the time of the loan commitment. APF
anticipates that its mortgage loans will continue to generate qualified income
under the 75% and 95% income tests.
APF will also receive payments under the terms of secured equipment leases.
Although the secured equipment leases are structured as leases, Shaw Pittman is
of the opinion that, subject to certain assumptions, the secured equipment
leases will be treated as loans secured by personal property for federal income
tax purposes. If the secured equipment leases are treated as loans secured by
personal property for federal income tax purposes, then the portion of the
payments under the terms of the secured equipment leases that represents
interest will not satisfy the 75% gross income test. APF believes, however,
that the aggregate amount of such non-qualifying income from the secured
equipment leases will not cause APF to exceed the limits on nonqualifying
income under the 75% gross income test.
If, contrary to Shaw Pittman's opinion, the IRS treats the secured equipment
leases as true leases rather than as loans secured by personal property, the
payments under the terms of the secured equipment leases will be treated as
rents from personal property. Rents from personal property will satisfy both
the 75% and 95% gross income tests only if they are received in connection with
a lease of real property and the rent attributable to the personal property
does not exceed 15% of the total rent received from the tenant in connection
with the lease. If rents attributable to personal property exceed 15% of the
total rent received from a particular tenant, however, then the portion of the
total rent attributable to personal property will not satisfy either the 75% or
95% gross income tests. APF believes, however, that if the income under the
secured equipment leases was treated as rents from personal property, the
aggregate of any amounts that exceed 15% of the total rent received from a
particular tenant will not cause APF to exceed the limits on nonqualifying
income under either the 75% or the 95% gross income test.
Prior to the Acquisition, APF will increase its restaurant management,
development and financing capabilities by acquiring the CNL Restaurant
Businesses. As a result, in the future APF may assist third parties with
raising capital, making acquisitions, and performing due diligence. APF may
also provide to third parties such services as asset management, accounting
services, construction and development services, and acquisition and financing
advisory services. The income derived by APF from providing these services to
third parties will not be qualifying income under the 75% and 95% gross income
tests. APF does not anticipate, however, that the income derived from such
services, together with any other nonqualifying income for purposes of the 95%
gross income test, will equal or exceed five percent of APF's annual gross
income, and does not anticipate that the income derived from such services,
together with any other nonqualifying income for purposes of the 75% gross
income test, will equal or exceed 25% of APF's annual gross income.
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If APF fails to satisfy one or both of the 75% or 95% tests for any taxable
year, it may still qualify as a REIT if:
. APF's failure is due to reasonable cause and not willful neglect;
. APF reports the nature and amount of each item of its income on a
schedule attached to its tax return for such year; and
. the reporting of any incorrect information is not due to fraud with
intent to evade tax.
Even if these three requirements are met and APF is not disqualified as a
REIT, however, a penalty tax would be imposed by reference to the amount by
which APF failed the 75% or 95% income test.
Asset Tests. At the end of each quarter of APF's taxable year, at least 75%
of the value of its total assets must consist of "real estate assets," cash
and cash items including receivables, and certain government securities. The
balance of APF's assets generally may be invested without restriction, except
that securities holdings not within the 75% class of assets generally must
not, with respect to any one issuer, exceed 5 percent of the value of APF's
assets or 10% of the issuer's outstanding voting securities. The term "real
estate assets" includes:
. real property,
. interests in real property,
. leaseholds of land or improvements thereon, and mortgages on any such
property or leasehold and
. any property attributable to the temporary investment of new capital in
stock or a debt instrument for the one-year period beginning on the date
that APF receives the capital.
When a mortgage is secured by both real property and other property, it is
considered to constitute a mortgage on real property to the extent of the fair
market value of the real property at the time when APF is committed to make
the loan. In the case of a construction loan secured by both real property and
other property, the loan is treated as a mortgage on real property to the
extent of the reasonably estimated cost of construction. The bulk of the APF's
assets will be real property, but APF will also hold the secured equipment
leases. Shaw Pittman is of the opinion, based on certain assumptions, that the
secured equipment leases will be treated as loans secured by personal property
for federal income tax purposes. Therefore, the secured equipment leases will
not qualify as "real estate assets." However, APF has represented that, at the
end of each quarter, the value of the secured equipment leases, together with
any personal property owned by APF, has been and will be less than 25% of
APF's total assets and that the value of the secured equipment leases entered
into with any particular tenant or borrower has been and will be less than
five percent of APF's total assets. APF does not have any independent
appraisals to support this representation, and Shaw Pittman, in rendering its
opinion as to the qualification of APF as a REIT, is relying on the
conclusions of APF and its senior management as to the relative values of
APF's assets. The IRS may contend, however, that either (1) the value of the
secured equipment leases entered into with any particular tenant or borrower
represents more than five percent of APF's total assets, or (2) the value of
the secured equipment leases, together with any personal property owned by
APF, exceeds 25% of APF's total assets.
Ownership Tests. The Code provides the following ownership requirements for
qualification as a REIT:
. during the last half of each taxable year, not more than 50% in value of
the REIT's outstanding shares may be owned, directly or indirectly, by
five or fewer individuals or certain entities; and
. there must be at least 100 stockholders on at least 335 days of a 12-
month taxable year.
These two requirements do not apply to the first taxable year for which
REIT election is made. In keeping with these requirements, APF's Articles of
Incorporation generally prohibit any person or entity from actually,
constructively or beneficially acquiring or owning more than 9.8% of the
issued and outstanding equity
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securities. APF's Articles of Incorporation also empower APF's Board of
Directors to redeem, at its option, a sufficient number of APF Shares to comply
with these ownership tests or to assure continued conformity with them.
Under APF's Articles of Incorporation, the Board of Directors may require
each holder of APF Shares to disclose to APF's Board of Directors information
regarding actual, constructive or beneficial ownership of APF Shares. Certain
Treasury Regulations govern the method by which APF is required to demonstrate
compliance with these stock ownership requirements and the failure to satisfy
such regulations could cause APF to fail to qualify as a REIT. We believe that
APF will meet these stock ownership requirements for each taxable year and will
be able to demonstrate its compliance with these requirements.
Distribution Requirements. APF must distribute to its stockholders for each
taxable year ordinary income dividends in an amount equal to at least (a) 95
percent of the sum of (1) its "real estate investment trust taxable income" and
(2) the excess of net income from foreclosure property over the tax on such
income, minus (b) certain excess noncash income. "Real estate investment trust
taxable income" generally is the taxable income of a REIT computed as if it
were an ordinary corporation, with certain adjustments. Distributions must be
made in the taxable year to which they relate, or, if declared before the
timely filing of APF's tax return for such year and paid not later than the
first regular dividend payment after such declaration, in the following taxable
year.
APF intends to make distributions to stockholders that will meet the 95%
distribution requirement. Under some circumstances, however, APF may not have
sufficient funds from its operations to make cash distributions to satisfy the
95% distribution requirement. For example, in the event of the default or
financial failure of one or more tenants or lessees, APF might be required
under federal income tax principles to continue to accrue rent for some period
of time even though APF would not currently be receiving the corresponding
amounts of cash. Similarly, APF might not be entitled, under federal income tax
principles, to deduct certain expenses at the time those expenses are incurred.
In either case, APF's cash available for making distributions might not be
sufficient to satisfy the 95% distribution requirement. If the cash available
to APF is insufficient to make the necessary distributions, APF might raise
cash by borrowing funds, issuing new securities or selling assets. If APF
ultimately were unable to satisfy the 95% distribution requirement, it would
fail to qualify as a REIT and, as a result, would be subject to federal income
tax as an ordinary corporation.
If APF fails to satisfy the 95% distribution requirement as a result of an
adjustment to its tax returns by the IRS, under certain circumstances it may be
able to rectify its failure by paying a "deficiency dividend" plus a penalty
and interest within 90 days after such adjustment. This deficiency dividend
would be included in APF's deductions for dividends paid for the taxable year
affected by such adjustment. The deduction for a deficiency dividend will be
denied, however, if any part of the adjustment resulting in the deficiency is
attributable to fraud with intent to evade tax or to willful failure to file an
income tax return on time.
Opinion of Shaw Pittman. Based upon representations made by officers of APF
with respect to relevant factual matters, upon the existing Code provisions,
Treasury Regulations, and reported administrative and judicial interpretations
of the Code and Treasury Regulations, upon Shaw Pittman's independent review of
relevant documents, and upon the assumption that APF will operate in the manner
described in this consent solicitation, Shaw Pittman has opined the following:
. APF qualified as a REIT under the Code for its taxable years ending
through December 31, 1998;
. APF is organized in conformity with the requirements for qualification as
a REIT; and
. APF's proposed method of operation will enable it to meet the
requirements for qualification as a REIT.
You should bear in mind, however, that APF's ability to qualify and remain
qualified as a REIT depends upon actual operating results and future actions by
and events involving APF and others, including changes in tax laws. Shaw
Pittman's opinion does not ensure that the actual results of APF's operations
and future actions
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and events will enable APF to satisfy in any given year the requirements for
qualification and taxation as a REIT.
Upon receipt of a written request from you or from your representative
designated in writing, we will provide you with a free copy of Shaw Pittman's
opinion.
Pending REIT Legislation. On April 28, 1999, the Real Estate Investment
Trust Modernization Act was introduced in the House of Representatives by
Representative William M. Thomas of California, with the support of over half
of the members of the House Ways and Means Committee. The same legislation was
introduced in the Senate on May 14, 1999. If enacted, the proposed legislation
would implement a number of changes to the Internal Revenue Code's treatment of
REITs.
One of the provisions of this legislation would prohibit APF from holding
securities possessing greater than 10% of the voting power or the value of any
issuer. Because the term "securities" includes loans that are not secured by
real property, APF would not be permitted to make loans with principal amounts
exceeding 10% of the value of a borrower, unless the loans were secured by real
property. This restriction would impact APF's ability to enter into
securitization transactions involving non-mortgage loans. It would also require
APF to dispose of any non-mortgage loans in the principal amounts of which
exceeded 10% of the value of their issuers, including, for this purpose, any
equipment leases treated as loans for federal income tax purposes.
It is not clear whether this legislation will be enacted and, if it is,
which provisions will be included and what their effective dates will be.
Additional proposals may be made by the Clinton Administration or by members of
Congress. It is impossible to predict the nature of those proposals, whether
they would be enacted, and their effect on APF. There can be no assurance,
however, that changes in legislation would not have a material adverse effect
on APF.
Characterization of Leases. APF has purchased and intends to purchase
restaurant properties with both new and existing buildings and lease them to
franchisees or corporate franchisors pursuant to leases of the type described
in "APF's Business and The Restaurant Properties--The Restaurant Properties--
Financial Products and Services--Description of Leases." APF's ability to claim
certain tax benefits associated with ownership of the restaurant properties,
such as depreciation, depends on a determination that the lease transactions
engaged in by APF are true leases, under which APF is the owner of the leased
restaurant property for federal income tax purposes, rather than a conditional
sale of the restaurant property or a financing transaction. If it is determined
that APF is not the owner of the restaurant properties for federal income tax
purposes, then APF could suffer adverse consequences, such as the denial of
APF's depreciation deductions. A denial of APF's depreciation deductions could
result in a determination that APF's distributions to stockholders were
insufficient to satisfy the 95% distribution requirement for qualification as a
REIT. As discussed above, however, if APF has sufficient cash, it may be able
to remedy any past failure to satisfy the distribution requirements by paying a
"deficiency dividend" plus a penalty and interest. Furthermore, in the event
that APF was not the owner of a particular restaurant property, in the opinion
of Shaw Pittman the income that APF would receive pursuant to the
recharacterized lease would constitute interest qualifying under the 95% and
75% gross income tests by reason of being interest on an obligation secured by
a mortgage on an interest in real property, because the legal ownership
structure of such restaurant property would have the effect of making the
building serve as collateral for a debt obligation.
The characterization of transactions as leases, conditional sales, or
financings has been addressed in numerous instances. The courts have not
identified any one determinative factor of whether the lessor or the lessee of
property is to be treated as the owner. Judicial decisions and IRS
pronouncements with respect to the characterization of transactions as either
leases, conditional sales, or financing transactions have clearly stated that
the characterization of leases for tax purposes is a question that must be
decided on the basis of a weighing of many factors, and courts have reached
different conclusions even where characteristics of two lease transactions were
substantially similar.
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While certain characteristics of the leases, such as the fact that such
leases are "triple-net" leases, suggest that APF might not be the owner of the
restaurant properties, many other characteristics indicate the bona fide nature
of such leases and that APF is the owner of the restaurant properties. For
example, under the types of leases described in "APF's Business and The
Restaurant Properties--The Restaurant Properties--Financial Products and
Services--Description of Leases," APF bears the risk of substantial loss in the
value of the restaurant properties because it uses an equity investment, rather
than nonrecourse indebtedness to acquire its interest in the restaurant
properties. Further, APF, rather than the tenant, benefits from any
appreciation in the restaurant properties, since APF has the right at any time
to sell or transfer the restaurant properties, subject to the tenant's right to
purchase the property at a price not less than the restaurant property's fair
market value.
Other factors that are consistent with the ownership of the restaurant
properties by APF are:
. the tenants are liable for repairs and are required to return the
restaurant properties in reasonably good condition;
. insurance proceeds generally are to be used to restore the restaurant
properties and, to the extent not so used, belong to APF;
. the tenants agree to subordinate their interests in the restaurant
properties to the lien of any first mortgage upon delivery of a
nondisturbance agreement and agree to pay rent to the purchaser upon any
foreclosure sale; and
. based on APF's representation that the restaurant properties can
reasonably be expected to have at the end of their lease terms a fair
market value of at least 20% of APF's cost and a remaining useful life of
at least 20% of their useful lives at the beginning of the leases, APF
has retained a significant residual interest in the restaurant
properties. Moreover, APF will not be primarily dependent upon tax
benefits in order to realize a reasonable return on its investments.
For the restaurant properties for which APF owns the buildings and the
underlying land, assuming (1) APF leases the restaurant properties on
substantially the same terms and conditions described in "APF's Business and
The Restaurant Properties--The Restaurant Properties--Description of Leases,"
and (2) as is represented by APF, the residual value of the restaurant
properties remaining after the end of their lease terms and all renewal periods
may reasonably be expected to be at least 20% of APF's cost of such restaurant
properties, and the remaining useful lives of the restaurant properties after
the end of their lease terms and all renewal periods, may reasonably be
expected to be at least 20% of the restaurant properties' useful lives at the
beginning of their lease terms, it is Shaw Pittman's opinion that APF will be
treated as the owner of the restaurant properties for federal income tax
purposes and will be entitled to claim depreciation and other tax benefits
associated with such ownership. In the case of the restaurant properties for
which APF does not own the underlying land, Shaw Pittman cannot opine that the
transactions will be characterized as leases, but will opine that the
transactions will be characterized as financing transactions and the income
from the transactions will constitute interest on mortgages secured by real
property.
Securitizations. From time to time, APF intends to enter into one or more
securitization transactions. In a securitization, APF will consolidate some of
the outstanding real estate loans it holds into a single portfolio, and then
sell interests in the portfolio to outside investors. Depending on how they are
structured, securitizations can be classified for federal income tax purposes
either as a sale of assets or as a borrowing against assets. APF intends to
structure its securitizations so as to avoid characterization of the
transactions as sales of the underlying mortgages and, in appropriate cases,
will seek the advice or opinion of tax counsel. If APF enters into a
securitization that is nevertheless treated as a sale for federal income tax
purposes, the securitization will be treated as a prohibited transaction, which
is a sale of property held primarily for sale to customers in the ordinary
course of business. Income from a prohibited transaction is subject to a
special tax equal to 100% of the income derived from the prohibited
transaction. In no event, however, would this treatment jeopardize APF's status
as a REIT.
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Taxation of Stockholders
Taxable Domestic Stockholders. For any taxable year in which APF qualifies
as a REIT for federal income tax purposes, if you, as a stockholder, are a
United States person, which is generally, any person other than a nonresident
alien individual, a foreign trust or estate or a foreign partnership or
corporation, you generally will be taxed in the following manner:
. Distributions made by APF to you generally will be taxed as ordinary
income.
. Amounts that you receive that are properly designated as capital gain
dividends by APF generally will be taxed as long-term capital gain, to
the extent that they do not exceed APF's actual net capital gain for the
taxable year.
. If you are a corporate stockholder, you may be required to treat up to
20% of certain capital gain dividends as ordinary income. Such ordinary
income and capital gain are not eligible for the dividends received
deduction allowed to corporations.
. APF may elect to retain and pay income tax on its net long-term capital
gain. If APF so elects, you will take into income your share of the
retained capital gain as long-term capital gain and will receive a credit
or refund for your share of the tax paid by APF, and you will increase
the basis of your APF shares by an amount equal to the excess of the
retained capital gain included in your income over the tax deemed paid by
you.
. Distributions in excess of APF's current or accumulated earnings and
profits will not be taxable to you to the extent that they do not exceed
the adjusted basis of your APF Shares, but rather will reduce the
adjusted basis of your APF Shares. To the extent that distributions in
excess of current and accumulated earnings and profits exceed the
adjusted basis of your APF Shares, such distributions will be included in
your income as long-term or short-term capital gain depending on how long
you have held the APF shares, assuming the shares are a capital asset in
your hands.
. Any distribution that is (1) declared by APF in October, November or
December of any calendar year and payable to stockholders of record on a
specified date in such months and (2) actually paid by APF in January of
the following year, shall be deemed to have been received by each
stockholder on December 31st of the calendar year in which the dividend
is declared and, as a result, will be includable in your gross income for
that taxable year.
. You may not deduct on your income tax returns any net operating or net
capital losses of APF.
. Upon the sale or other disposition of your APF Shares, you generally will
recognize capital gain or loss equal to the difference between the amount
realized on the sale or other disposition and the adjusted basis of your
APF Shares involved in the transaction. The gain or loss will be long-
term capital gain or loss if, at the time of sale or other disposition,
the APF Shares involved have been held for more than one year.
. If you receive a capital gain dividend with respect to APF Shares that
you have held for six months or less at the time of sale or other
disposition, any loss recognized by you will be treated as long-term
capital loss to the extent of the amount of the capital gain dividend
that was treated as long-term capital gain.
. Generally, the redemption of APF Shares by APF will result in recognition
of ordinary income by you unless you "completely terminate" or
substantially reduce your interest in APF, as described in the Code.
APF will notify you of which portions of each distribution, in its judgment,
constitute ordinary income, capital gain or return of capital for federal
income tax purposes. In addition, APF will report to you and to the IRS the
amount of dividends paid or treated as paid during each calendar year, and the
amount of tax withheld, if any. Under the backup withholding rules, you may be
subject to backup withholding at the rate of 31% with respect to dividends paid
unless you (a) are a corporation or fit within certain other exempt categories
and,
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when required, demonstrate this fact, or (b) provide a taxpayer identification
number, certify as to no loss of exemption from backup withholding, and
otherwise comply with applicable requirements of the backup withholding rules.
If you do not provide APF with a correct taxpayer identification number, you
may also be subject to penalties imposed by the IRS. You may credit any amount
paid to the IRS as backup withholding against your income tax liability. In
addition, APF may be required to withhold a portion of capital gain dividends
to you if you fail to certify your non-foreign status to APF as described below
in "--Foreign Stockholders."
The state and local income tax treatment of you and APF may not conform to
the federal income tax treatment described above. As a result, you should
consult your tax advisors for an explanation of how state and local tax laws
would affect your ownership of APF Shares.
The tax treatment discussed above is a summary of the general rules and may
not deal with all of the tax consequences applicable to you in light of your
particular investment or other circumstances. Therefore, you should consult
your own tax advisors for an explanation of the tax consequences to you of the
receipt, ownership, and disposition of APF Shares.
Tax-Exempt Stockholders. If you are an APF stockholder and a tax-exempt
entity, you generally will be taxed in the following manner:
. Dividends paid by APF to you generally will not constitute "unrelated
business taxable income" as defined in section 512(a) of the Code,
provided that you have not financed the acquisition of APF Shares with
"acquisition indebtedness" within the meaning of section 524(c) of the
Code and your APF Shares are not otherwise used in an unrelated trade or
business.
. If you are a qualified trust that holds more than 10% by value of the
shares of APF, and if (i) treating qualified trusts holding APF Shares as
individuals would result in a determination that APF is "closely held"
within the meaning of section 856(h)(1) of the Code, and (ii) APF is
"predominantly held" by qualified trusts, you may be required to treat a
certain percentage of APF's distributions as unrelated business taxable
income. The restrictions on ownership of APF Shares in APF's Articles of
Incorporation will prevent application of the provisions treating a
portion of REIT distributions as unrelated business taxable income to
tax-exempt entities purchasing APF Shares, absent a waiver of the
restrictions by APF's Board of Directors.
The tax treatment of distributions by qualified retirement plans, IRAs,
Keogh plans and other tax-exempt entities is beyond the scope of this
discussion. If you are one of these entities, you should consult your own tax
advisors regarding such questions.
Foreign Stockholders. The rules governing U.S. federal income taxation of
Non-U.S. Stockholders are complex, and we will not try here to provide more
than a summary of such rules. If you are a nonresident alien individual,
foreign corporation, foreign participant or other prospective foreign
stockholder, you should consult with your tax advisors to determine the impact
of federal, state and local laws with regard to an investment in APF Shares
including any reporting requirements.
Assuming that the income from investment in APF Shares will not be
effectively connected with your conduct of a United States trade or business,
if you are a Non-U.S. Stockholder you generally will be taxed in the following
manner:
. Distributions that are not attributable to gain from sales or exchanges
by APF of United States real property interests and not designated by APF
as capital gain dividends will be treated as dividends of ordinary income
to the extent that they are made out of current and accumulated earnings
and profits of APF. Such dividends ordinarily will be subject to a
withholding tax equal to 30% of the gross amount of the dividend, unless
an applicable tax treaty reduces or eliminates that tax.
193
<PAGE>
. Distributions in excess of APF's current and accumulated earnings and
profits will not be taxable to you to the extent that such distributions
do not exceed the adjusted basis of your APF Shares, but rather will
reduce the adjusted basis of your APF Shares.
. To the extent that distributions in excess of current and accumulated
earnings and profits exceed the adjusted basis of your APF Shares, the
distributions will give rise to tax liability if you would otherwise be
subject to tax on any gain from the sale or disposition of your APF
Shares.
. If it cannot be determined at the time APF pays a distribution whether or
not the distribution will be in excess of current and accumulated
earnings and profits, the distribution will be subject to withholding at
the rate of 30%. You may seek a refund of the withheld amount from the
IRS, however, if it is subsequently determined that the distribution was,
in fact, in excess of APF's current and accumulated earnings and profits.
. APF is permitted, but not required, to make reasonable estimates of the
extent to which distributions exceed current or accumulated earnings and
profits. To the extent that the distributions are determined by APF to
exceed current or accumulated earnings and profits, they will generally
be subject to a 10 percent withholding tax, which may be refunded to the
extent it exceeds your actual U.S. tax liability, provided the required
information is furnished to the IRS.
. Distributions that are attributable to gain from sales or exchanges by
APF of United States real property interests will be taxed to you under
the provisions of the FIRPTA. Under FIRPTA, distributions attributable to
gain from sales of United States real property interests are taxed to you
as if such gain were effectively connected with a United States business.
You would thus be taxed at the normal capital gain rates applicable to
U.S. Stockholders, and subject to applicable alternative minimum tax and
a special alternative minimum tax in the case of nonresident alien
individuals. Also, distributions subject to FIRPTA may be subject to a
30% branch profits tax in the hands of a foreign corporate stockholder
not entitled to treaty exemption or rate reduction. APF is required by
applicable Treasury Regulations to withhold 35% of any distribution that
could be designated by APF as a capital gain dividend. You may credit
this amount against your FIRPTA tax liability.
. Gain that you recognize upon a sale of APF Shares generally will not be
taxed under FIRPTA if APF is a "domestically controlled REIT." APF
currently believes that it is, and expects to continue to be, a
"domestically controlled REIT."
Gain not subject to FIRPTA nonetheless will be taxable to you if (1)
investment in the APF Shares is treated as "effectively connected" with your
U.S. trade or business, or (2) you are a nonresident alien individual who was
present in the United States for 183 days or more during the taxable year and
certain other conditions are met. If you are a foreign corporate stockholder,
"effectively connected" gain realized by you may be subject to an additional
30% branch profits tax, subject to possible exemption or rate reduction under
an applicable tax treaty. If the gain on the sale of your APF Shares were to be
subject to taxation under FIRPTA, you would be subject to the same treatment as
U.S. stockholders with respect to such gain and subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals, and the purchaser of your APF Shares would be
required to withhold and remit to the IRS 10% of the purchase price.
194
<PAGE>
EXPERTS
The consolidated balance sheets of CNL American Properties Fund, Inc. as of
December 31, 1998 and 1997 and the consolidated statements of earnings,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998, included in this consent solicitation and the balance
sheets of CNL Income Fund, Ltd. and CNL Income Fund II, Ltd. through CNL Income
Fund XVI, Ltd. as of December 31, 1998 and 1997 and the related statements of
income, partners' capital, and cash flows for each of the three years in the
period ended December 31, 1998 included in this consent solicitation have been
included herein and therein in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing. The consolidated financial
statements of CNL Financial Corporation and the financial statements of CNL
Financial Services, Inc. included in this consent solicitation have been
audited by Arthur Andersen LLP, independent certified public accountants, as
indicated in their reports with respect thereto and are included herein in
reliance upon the authority of said firm as experts in giving said reports. The
audited financial statements of CNL Fund Advisors, Inc. included in this
consent solicitation have been audited by McDirmit, Davis, Lauteria, Puckett,
Vogel & Company, P.A., independent certified public accountants, as indicated
in their report with respect thereto, and are included therein in reliance upon
the authority of said firm as experts in giving said reports.
The appraisals included as exhibits to this Registration Statement on Form
S-4 have been prepared by Valuation Associates Real Estate Group, Inc. and are
included therein in reliance upon the authority of said firm as experts in
giving such reports.
LEGAL MATTERS
Certain legal matters, including certain tax matters, will be passed upon
for APF by Shaw Pittman, Washington, D.C., a law partnership including
professional corporations. Certain members of Shaw Pittman invested in the
Income Funds in an aggregate amount of $174,000, and, assuming all of the
Income Funds are acquired by APF, such members will receive an aggregate of
8,035 APF Shares.
Certain legal matters will be passed upon for the Income Funds by Baker &
Hostetler LLP.
195
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
APF and each Income Fund are subject to the reporting requirements of the
Exchange Act, and are required to file reports and other information with the
SEC, 450 Fifth Street N.W., Washington, D.C. 20549. In addition, APF has filed
a Registration Statement on Form S-4 under the Securities Act with respect to
the securities offered pursuant to this consent solicitation. This consent
solicitation, which is part of the Registration Statement, does not contain all
of the information set forth in the Registration Statement and the exhibits and
financial schedules thereto. For further information concerning the
Acquisition, you should refer to APF's Registration Statement and such exhibits
and schedules, which is available at the SEC's web site at http://www.sec.gov.
Also, you may examine copies of such documents without charge at, or obtain
upon payment of prescribed fees from, the Public Reference Section of the SEC
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, or at the
regional offices of the SEC located at Room 1400, 75 Park Place, New York, New
York 10007 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511. The SEC's web site also contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC.
A separate supplement to this consent solicitation has been prepared for
your Income Fund and will be delivered to you and the other Limited Partners of
your Income Fund. Upon receipt of a written request by you or your
representative so designated in writing, we will send a copy of any supplement
without charge. All requests should be directed to D.F. King & Co., 77 Water
Street, New York, New York 10005, (800) 207-3159
Statements contained in this consent solicitation or any supplements hereto
as to the contents of any contract or other document which is filed as an
exhibit to the Registration Statement are not necessarily complete, and each
such statement is qualified in its entirety by reference to the full text of
such contract or document.
In addition to applicable legal or NYSE requirements, if any, APF will send
to holders of APF Shares annual reports containing audited financial statements
with a report thereon by APF's independent public accountants and quarterly
reports containing unaudited financial information for each of the first three
quarters of each fiscal year.
196
<PAGE>
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
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly-owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999, and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties on a triple-net
basis, APF has the ability to offer a complete range of restaurant property
services to operators of national and regional restaurant chains, from triple-
net leasing and mortgage financing to site selection, construction management
and build-to-suit development. If APF acquires all of the Income Funds in the
Acquisition, APF expects to have total assets of approximately $1.5 billion at
the time of the consummation of the Acquisition and will be one of the largest
triple-net lease REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 578,880 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is uncertain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for
S-1
<PAGE>
trading on the NYSE. We do not know the value at which an APF Share will trade
on the NYSE upon listing. It is possible that the APF Shares will trade at
prices substantially below the exchange value. APF has, however, recently sold
$750 million of APF Shares through three public offerings. In each offering,
the offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At March 31, 1999, APF has invested all of the net offering proceeds to acquire
restaurant properties, to make mortgage loans and to pay fees and other
expenses.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the Acquisition?
There are a number of material risks and considerations that you should
consider, including:
. We are uncertain as to the value at which APF Shares will trade following
listing.
. We have material conflicts in light of our being both general partners of
the Income Funds and members of APF's Board of Directors.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. As stated below, the Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote against the
Acquisition.
Did you receive a fairness opinion in connection with APF's acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
with respect to the fairness, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the colored
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's acquisition of your
Income Fund. If you prefer, you may instead vote by telephone, following the
instructions on your consent form. If you sign and send in your consent form
and do not indicate how you want to vote, your consent form will be
S-2
<PAGE>
counted as a vote "For" the Acquisition. If you do not vote or you abstain from
voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2004 in an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only receive the notes if you vote "Against" the
Acquisition, and you elect to receive notes on your consent form. You will
receive APF Shares if your Income Fund elects to be acquired in the Acquisition
and you vote "For" the Acquisition, or you vote "Against" the Acquisition and
do not affirmatively select the notes option on your consent form. In addition,
if Limited Partners in your Income Fund elect to receive notes in an amount
greater than 15% of the estimated value of APF Shares, based on the exchange
value, to be paid to your Income Fund, then APF has the right to decline to
acquire your Income Fund. The notes will not be listed on any exchange or
automated quotation system, and a market for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
the tax that you must pay will generally be based on the difference between the
value of the APF Shares you receive and the tax basis of your units. If you
elect to receive notes, your tax will be based upon your allocable share of the
gain which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Some of
the gain may be subject to the 25% rate of tax applicable to certain types of
real property gain.
We urge you to consult with your tax advisor to evaluate the taxes that will be
incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $1,868. To
review the tax consequences to the Limited Partners of the Income Funds in
greater detail, see pages 180 through 194 of the consent solicitation and
"Federal Income Tax Considerations" in this supplement.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds acquired by
APF may be differently constructed, located in a different geographic area or
of a different restaurant chain than the restaurant properties owned by your
Income Fund. Because the market for real estate may vary from one region of the
country to another, the change in geographic diversity may expose you to
different and greater risks than those to which you are presently exposed. For
geographic information regarding APF's and the Income Funds' restaurant
properties, see "APF's Business and The Restaurant Properties--Business
Objectives and Strategies" and "--The Restaurant Properties--General" and
"Business of the Income Funds--Description of Restaurant Properties" in the
consent solicitation.
S-3
<PAGE>
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund. This description is qualified in its entirety
by the more detailed discussion in the section entitled "Risk Factors"
contained in the consent solicitation.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease below the exchange value upon listing.
Your Income Fund will be receiving 578,880 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices substantially below
the exchange value or the historical per share book value of the assets of APF.
The APF Shares have been approved for listing on the NYSE, subject to official
notice of issuance. Prior to listing, the existing APF stockholders have not
had an active trading market in which they could sell their APF Shares.
Additionally, any Limited Partners of the Income Funds who become APF
stockholders as a result of the Acquisition, will have transformed their
investment in non-tradable units into an investment in freely tradable APF
Shares. Consequently, some of these stockholders may choose to sell their APF
Shares upon listing at a time when demand for APF Shares may be relatively low.
The market price of the APF Shares may be volatile after the Acquisition, and
the APF Shares could trade at prices substantially less than the exchange value
as a result of increased selling activity following the issuance of the APF
Shares, the interest level of investors in purchasing the APF Shares after the
Acquisition and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund made $843, $843 and $1,136, respectively, in distributions per $10,000
investment to you. The amount distributed to you in 1998 included a special
distribution of net sales proceeds of $391 per $10,000 investment. While
historically, APF has made distributions equal to 7.625% per APF Share, based
on the exchange value, we cannot be sure that APF will be able to maintain this
level of distributions in the future. In the event that APF is unable to
maintain this level of distributions, your distributions per $10,000 investment
may decrease substantially after the Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have two material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne have a different interest in the completion of the Acquisition which
may conflict with your interest as a Limited Partner of the Income Fund or with
their own positions as the general partners of your Income Fund. Second, while
we will not receive any APF Shares as a result of APF's Acquisition of your
Income Fund, we, as the general partners of your Income Fund, may be required
to pay all or a substantial portion of the Acquisition costs allocated to your
Income Fund to the extent that you or other Limited Partners of your Income
Fund vote against the Acquisition. For additional information regarding the
Acquisition costs allocated to your Income Fund, see "Comparison of Alternative
Effect on Financial Condition and Results of Operations" contained in this
supplement.
S-4
<PAGE>
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own and lease on a triple-net basis, on the date that the Acquisition
is consummated, assuming only your Income Fund was acquired as of March 31,
1999, 530 restaurant properties. The risks inherent in investing in an
operating company such as APF include that APF may invest in new restaurant
properties that are not as profitable as APF anticipated, may incur substantial
indebtedness to make future acquisitions of restaurant properties which it may
be unable to repay and may make mortgage loans to prospective operators of
national and regional restaurant chains which may not have the ability to
repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through sale of your APF Shares, not from
liquidation proceeds from restaurant properties. Continuation of your Income
Fund would, on the other hand, permit you eventually to receive liquidation
proceeds, if any, from the sale of the Income Fund's restaurant properties, and
your share of these sale proceeds could be higher than the amount realized from
the sale of your APF Shares or from the payments on any notes if you elect to
receive notes.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default 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. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a
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<PAGE>
residual-interest security and retain an interest-only strip security. The fair
value of the residual-interest and interest-only strip security would be the
present value of the estimated net cash flows to be received after considering
the effects of prepayments and credit losses. The capitalized mortgage
servicing rights and mortgage-related securities would be valued using
prepayment, default, and interest rate assumptions that APF believes are
reasonable. The amount of revenue recognized upon the sale of loans or loan
participations will vary depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
March 31, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.62x and its ratio of debt-to-total assets was
28.04%. If all of the Income Funds were acquired as of that date, APF's debt
service ratio would have been 3.66x and its ratio of debt-to-total assets would
have been 27.73%. Up through the time immediately prior to the consummation of
the Acquisition, as a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former limited partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
S-6
<PAGE>
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgages. APF
typically does not require that a third party guarantee the obligations of the
tenant or the borrower. The ability of the tenants or borrowers to pay their
obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to: (1)
national, regional and local economic conditions which may be adversely
affected by industry slowdowns, employer relocations, prevailing employment
conditions and other factors, and which may reduce consumer demand for the
products offered by APF's customers; (2) local real estate conditions; (3)
changes or weaknesses in specific industry segments; (4) perceptions by
prospective customers of the safety, convenience, services and attractiveness
of the restaurant chain; (5) changes in demographics, consumer tastes and
traffic patterns; (6) the ability to obtain and retain capable management; (7)
changes in laws, building codes, similar ordinances and other legal
requirements, including laws increasing the potential liability for
environmental conditions existing on properties; (8) the inability of a
particular restaurant chain's computer system, or that of its franchisor or
vendors, to adequately address Year 2000 issues; (9) increases in operating
expenses; and (10) increases in minimum wages, taxes, including income,
service, real estate and other taxes, or mandatory employee benefits.
APF has tenants of two significant restaurant chains that have filed for
bankruptcy protection.
The fact that APF has tenants of two significant restaurant chains that have
filed for bankruptcy protection may adversely affect APF's total rental, earned
and interest income. Because all of APF's properties are leased on a triple-net
basis, if a tenant has defaulted on its lease obligations or has declared
bankruptcy, it would reduce APF's rental, earned and interest income until APF
could lease those affected properties to a new tenant or tenants. As of March
31, 1999, your Income Fund had no tenants under bankruptcy protection, and
therefore, assuming that your Income Fund is acquired by APF, you, as an APF
stockholder or noteholder, may be subject to the adverse consequences
associated with having tenants under bankruptcy protection.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funds available for stockholder
distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as a stockholder, would be reduced substantially for
each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to certain adjustments that are unique to REITs, a REIT generally
must distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
S-7
<PAGE>
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
For a more detailed discussion of the risks associated with the Acquisition,
see "Risk Factors" in the consent solicitation.
CONSIDERATION PAID TO INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth information regarding the estimated value of
the consideration that your Income Fund will receive in the Acquisition. The
APF Shares payable to your Income Fund will not change if APF acquires fewer
than all of the Income Funds in the Acquisition. This data assumes that none of
the Limited Partners of your Income Fund have elected to receive notes. You
should note that the APF Shares may trade at prices substantially below the
exchange value upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited
Partner
Investments
Original Less any
Limited Distributions
Partner of Net Sales Estimated Value of
Investments Proceeds per Estimated APF Shares per
Less any Average Number of Value of APF Estimated Value Average $10,000
Distributions $10,000 APF Shares Shares Estimated of APF Shares Original Limited
of Net Sales Original Offered to Payable to Acquisition after Acquisition Partner
Proceeds(1) Investment(1) Income Fund Income Fund Expenses Expenses Investment
- ------------- ------------- ----------- ------------ ----------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
$12,001,150 $8,001 578,880 $11,577,600 $158,000 $11,419,600 $7,613
</TABLE>
- --------
(1) The original Limited Partner investment in the Income Fund was 15,000,000.
These columns reflect, as of March 31, 1999, an adjustment to the Limited
Partners' original investments based on distributions of net sales proceeds
received from sales of restaurant properties (both as a special
distribution and those that were added to working capital and subsequently
distributed).
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2004. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2004. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest. For more detailed information, see "The Acquisition" and
"Description of the Notes" in the consent solicitation.
S-8
<PAGE>
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1)................................................... $ 6,505
Appraisals and Valuation(2)..................................... 2,640
Fairness Opinions(3)............................................ 30,000
Solicitation Fees(4)............................................ 5,831
Printing and Mailing(5)......................................... 38,851
Accounting and Other Fees(6).................................... 12,467
--------
Subtotal.................................................... 96,294
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(7)....................... 28,204
Legal Closing Fees(8)........................................... 13,931
Partnership Liquidation Costs(9)................................ 19,571
--------
Subtotal.................................................... 61,706
--------
Total........................................................... $158,000
========
</TABLE>
--------
(1) Aggregate legal fees to be incurred by all of the Income
Funds in connection with the Acquisition is estimated to
be $312,063. Your Income Fund's pro-rata portion of these
fees was determined based on the percentage of the value
of the APF Share consideration payable to your Income
Fund, based on the exchange value, to the total value of
the APF Share consideration payable to all of the Income
Funds, based on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by
all of the Income Funds in connection with the Acquisition
were $105,420. Your Income Fund's pro-rata portion of
these fees was determined based on number of restaurant
properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg
Mason and incurred a fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to
be $249,626. Your Income Fund's pro-rata portion of these
fees was determined based on the number of Limited
Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the
Income Funds in connection with the Acquisition is
estimated to be $1,610,399. Your Income Fund's pro-rata
portion of these fees was determined based on the number
of Limited Partners in your Income Fund.
(6) Aggregate accounting and other fees to be incurred by the
Income Funds in connection with the Acquisition is
estimated to be $683,904. Your Income Fund's pro-rata
portion of these fees was determined based on the
percentage of your Income Fund's total assets as of March
31, 1999 to the total assets of all of the Income Funds as
of March 31, 1999.
(7) Aggregate title, transfer tax and recording fees to be
incurred by all of the Income Funds in connection with the
Acquisition is estimated to be $1,312,808. Your Income
Fund's pro-rata portion of these fees was determined based
on the percentage of the value of the APF Share
consideration payable to your
S-9
<PAGE>
Income Fund, based on the exchange value, to the total
value of the APF Share consideration payable to all of the
Income Funds, based on the exchange value.
(8) Aggregate legal closing fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to
be $648,454. Your Income Fund's pro-rata portion of these
fees was determined based on the percentage of your Income
Fund's total assets as of March 31, 1999 to the total
assets of all of the Income Funds as of March 31, 1999.
(9) Aggregate partnership liquidation costs to be incurred by
all of the Income Funds in connection with the Acquisition
is estimated to be $895,326. Your Income Fund's pro-rata
portion of these costs was determined based on the
percentage of the value of the APF Share consideration
payable to your Income Fund, based on the exchange value,
to the total value of the APF Share consideration payable
to all of the Income Funds, based on the exchange value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us in proportion to the exchange value of each of the Income Funds for which
we are a general partner.
S-10
<PAGE>
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 66 2/3% or more in value of your Income Fund's
restaurant properties. Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding units.
Consequence of Failure to Approve the Acquisition
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition, the Acquisition may
not be consummated under the terms of the partnership agreement. In such event,
we plan to continue to operate your Income Fund as a going concern and to
eventually dispose of your Income Fund's restaurant properties approximately 7
to 15 years after they were acquired or as soon thereafter if, in our opinion,
market conditions permit, as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at
. We and members of APF's management
intend to solicit actively your support for the Acquisition and would like to
use the special meeting to answer questions about the Acquisition and the
solicitation materials and to explain in person our reasons for recommending
that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain their votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning on attending the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about
, 1999 and will continue until the later of (a) , 1999,
a date not less than 60 calendar days from the initial delivery of the
solicitation materials, or (b) such later date as we may select and as to which
we give you notice. At our discretion, we may elect to extend the solicitation
period. Under no circumstances will the solicitation period be extended beyond
March 31, 2000. Any consent form received by Corporate Election Services prior
to 5:00 p.m., Eastern time, on the last day of the solicitation
S-11
<PAGE>
period will be effective provided that such consent form has been properly
completed and signed. If you fail to return a signed consent form by the end of
the solicitation period, your units will be counted as voting "Against" the
Acquisition of your Income Fund and you will receive APF Shares if your Income
Fund is acquired. If you prefer, you may instead vote by telephone according to
the instructions on your consent form.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the quarter
ended March 31, 1999, the aggregate amounts accrued or actually paid by your
Income Fund to us are shown below under "Historical Distributions Paid to the
General Partners and Affiliates" and the estimated amounts of compensation that
would have been paid had the Acquisition been in effect for the periods
presented, are shown below under "Pro Forma Distributions to Be Paid the
General Partners Following the Acquisition":
S-12
<PAGE>
<TABLE>
<CAPTION>
Quarter
Year Ended December 31, Ended
----------------------- March 31,
1996 1997 1998 1999
------- ------- ------- ---------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the General
Partners and Affiliates:
General Partner Distributions.............. -- -- -- --
Accounting and Administrative Services..... $67,685 $57,679 $63,981 $16,302
Broker/Dealer Commissions.................. -- -- -- --
Due Diligence and Marketing Support Fees... -- -- -- --
Acquisition Fees........................... -- -- -- --
Asset Management Fees...................... -- -- -- --
Real Estate Disposition Fees(1)............ -- -- 20,400 --
------- ------- ------- -------
Total historical........................ $67,685 $57,679 $84,381 $16,302
Pro Forma Distributions to Be Paid the
General Partners Following the Acquisition:
Cash Distributions on APF Shares........... -- -- -- --
Salary Compensation........................ -- -- -- --
------- ------- ------- -------
Total pro forma......................... -- -- -- --
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to certain minimum
returns to the Limited Partners. To date, no such fees have been paid since
the required minimum returns have not been made to the Limited Partners.
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
contained herein under the caption "Financial Statements" and in the consent
solicitation under the caption "Summary--Our Reasons for Supporting the
Acquisition--Prices for Income Fund Units."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31, 1999
---------------------------- --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
------ ---- ---- ---- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income... $ 798 $635 $715 $824 $ 662 $ 96 $ 95
Distributions from Sales of
Properties................. 574 -- -- -- 391 -- --
Distributions from Return of
Capital(1)................. 147 208 128 19 83 82 70
------ ---- ---- ---- ------ ---- ----
Total....................... $1,519 $843 $843 $843 $1,136 $178 $165
====== ==== ==== ==== ====== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from certain non-cash
items. This amount is not required to be presented as a return of capital
except for purposes of this table, and the Income Fund has not treated this
amount as a return of capital for any other purpose.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses during 1999. Thus, the pro forma information regarding
the distributions to APF stockholders for the quarter ended March 31, 1999 is
not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
S-13
<PAGE>
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the Acquisition
with those of several alternatives, the Acquisition is more economically
attractive to you and the other Limited Partners than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to certain closing conditions. Second, if your Income Fund is acquired,
all Limited Partners of your Income Fund who vote against the Acquisition will
be given the option of receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others, that we will be relieved
from certain ongoing liabilities with respect to the Income Fund if it is
acquired by APF. For a further discussion of the conflicts of interest and
potential benefits of the Acquisition to us, see "Conflicts of Interest" below.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. In addition, we compared the
values of the consideration which would have been received by you and the other
Limited Partners in alternative transactions and concluded that the Acquisition
is fair based on such comparison. We believe the Acquisition is the best way to
maximize the return on your investment because of your ability to participate
in the potential appreciation of APF Shares. Since the investment in your
Income Fund is an investment in a static portfolio due to the restrictions
contained in your Income Fund's partnership agreement and limited capital
resources, your investments have less of an opportunity to appreciate. Because
APF is a growth-orientated operating company, you will have the opportunity, as
an APF stockholder, to participate in APF's future growth.
S-14
<PAGE>
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinions of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinions of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., an affiliate of CNL Group Inc., and (3) Valuation
Associates has previously performed valuation appraisals for APF. See "Reports,
Opinions and Appraisals" in the consent solicitation.
On rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Funds,
and (c) the method of allocating the APF Shares among the Income Funds, Legg
Mason did not address or render any opinion with respect to, any other aspect
of the Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition or
the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Legg Mason's opinion also does not compare the relative merits of the
Acquisition with those of any other transaction or business strategy which were
or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares will exceed the going concern value and
liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Net Book Value of the Income Fund. We calculated the book value of your
Income Fund under generally accepted accounting principles, or GAAP, as of
March 31, 1999 per average $10,000 original
S-15
<PAGE>
investment. Since the calculation of the book value was done on a GAAP basis,
it is primarily based on historical cost and, therefore, it is not indicative
of the true fair market value of your Income Fund. This figure was compared to
three other figures:
(1) the value of the Income Fund if it commenced an orderly liquidation of
its investment portfolio on December 31, 1998,
(2) the value of the Income Fund if it continued to operate in accordance
with its existing partnership agreement and business plans, and
(3) the estimated value of the APF Shares, based on the exchange value,
paid to each Income Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Original Estimated Value of
Limited Partner APF Shares per
Investments Less Average $10,000
any Distributions GAAP Book Liquidation Going Concern Original Limited
of Sales Proceeds(1) Value Value(2) Value(2) Partner Investment
-------------------- --------- ----------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
CNL Income Fund, Ltd.... $8,001 $5,471 $7,030 $7,589 $7,613
</TABLE>
- --------
(1) This column reflects, as of December 31, 1998, an adjustment to the Limited
Partners' original average $10,000 investment based on distributions of net
sales proceeds received from sales of restaurant properties (both as a
special distribution and those that were added to working capital
subsequently distributed).
(2) Liquidation and going concern values were based on appraisals prepared by
Valuation Associates. For a complete description of the methodologies
employed by Valuation Associates, see "Reports, Opinions and Appraisals" in
the consent solicitation.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have contractual
obligations pursuant to your Income Fund's partnership agreement as well as
state law to assess whether the terms of the Acquisition are fair and equitable
to the Limited Partners of your Income Fund without regard to whether the
Acquisition is fair and equitable to any of the other participants, including
the Limited Partners in other Income Funds. James M. Seneff, Jr. and Robert A.
Bourne act as the individual general partners of all of the Income Funds and
also as members of the Board of Directors of APF. While Messrs. Seneff and
Bourne have sought faithfully to discharge their obligations to your Income
Fund, there is an inherent conflict of interest in serving, directly or
indirectly, in a similar capacity with respect to your Income Fund and also on
APF's Board of Directors.
Lack of Independent Representation
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We have
been the parties responsible for structuring all the terms and conditions of
the Acquisition. Legal counsel engaged to assist with the preparation of the
S-16
<PAGE>
documentation for the Acquisition, including this consent solicitation, was
engaged by us and did not serve, or purport to serve, as legal counsel for the
Income Funds or Limited Partners. If an independent representative had been
retained for the Income Funds, the terms of the Acquisition may have been
different and possibly more favorable to the Limited Partners. In particular,
had separate representation for each of the Income Funds been arranged by us,
issues unique to the value of each of the specific Income Funds might have been
highlighted or received greater attention, resulting in adjustments to the
value assigned to the assets of such Income Funds and increasing the number of
APF Shares or notes that would be allocable to such Income Fund if acquired in
the Acquisition.
Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive two material benefits. These benefits include:
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr.
Seneff serving as Chairman of APF and Mr. Bourne serving as Vice
Chairman. Furthermore, they will be entitled to receive performance-
based incentives, including stock options, under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of the Income Funds, we are legally liable for all
of Income Funds liabilities to the extent that the Income Funds are
unable to satisfy such liabilities. Because the partnership agreement
for each Income Fund prohibits the Income Funds from incurring
indebtedness, the only liabilities the Income Funds have are liabilities
with respect to their ongoing business operations. In the event that one
or more Income Funds are acquired by APF, we would be relieved of our
legal obligation to satisfy the liabilities of the acquired Income Fund
or Income Funds.
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Certain Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund. If
your Income Fund is acquired by APF, and you have voted "For" the Acquisition,
you will receive APF Shares. If you have voted "Against" the Acquisition but
your Income Fund is acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you
S-17
<PAGE>
receive from APF. Each year APF will send you a Form 1099-DIV reporting the
amount of taxable and nontaxable distributions paid to you during the preceding
year. The taxable portion of these distributions depends on the amount of APF's
earnings and profits. Because the Acquisition is a taxable transaction, APF's
tax basis in the acquired restaurant properties will be higher than your Income
Fund's tax basis had been in the same properties. At the same time, however,
APF may be required to utilize a slower method of depreciation with respect to
certain restaurant properties than that used by your Income Fund. As a result,
APF's tax depreciation from the acquired restaurant properties will differ from
your Income Fund's tax depreciation. Accordingly, under certain circumstances,
even if APF were to make the same level of distributions as your Income Fund, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you. For certain other differences attributable to APF's status as a REIT,
see "--Taxation of APF" and "--Taxation of Stockholders--Taxable Domestic
Stockholders" in the consent solicitation.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF, the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain and loss based on the
exchange value, for an average $10,000 original Limited Partner investment in
your Income Fund, is set forth in the table below for those Limited Partners
subject to federal income taxation.
<TABLE>
<CAPTION>
Estimated
Gain/(Loss) per
Average $10,000
Original Limited
Partner Investment(1)
---------------------
<S> <C>
CNL Income Fund, Ltd. .............................. $1,868
</TABLE>
- --------
(1) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be significantly below the exchange value.
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one more individuals or entities in exchange for the stock of that corporation,
and (2) immediately after the exchange, such individuals or entities are in
control of the corporation. For purposes of section 351(a), control is defined
as the ownership of stock possessing at least 80 percent of the total combined
voting power of all classes of stock entitled to vote and at least 80 percent
of the total number of shares of all other classes of stock of the corporation.
APF has represented to Shaw Pittman, APF's tax counsel, that, following the
Acquisition, the Limited Partners of the Income Funds will not own stock
possessing at least 80 percent of the total combined voting power of all
classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if
any, assumed by the Operating Partnership, and
S-18
<PAGE>
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2004, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses that
you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the notes may recognize gain in the year of the
Acquisition despite the fact that they will not receive cash with which to pay
the tax on the gain. Such Limited Partners will adjust the basis of the notes
as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes. See "--Tax Consequences of Liquidation and
Termination of Your Income Fund" below.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or the notes, as the case may be, to you.
The taxable year of your Income Fund will end at this time, and you must
report, in your taxable year that includes the date of the Acquisition, your
share of all income, gain, loss, deduction and credit for your Income Fund
through the date of the Acquisition, including gain or loss resulting
S-19
<PAGE>
from the Acquisition. If your taxable year is not the calendar year, you could
be required to recognize as income in a single taxable year your share of your
Income Fund's income attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units, and your holding period
for the notes for purposes of determining capital gain or loss from the
disposition of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employees'
beneficiary association, supplemental unemployment benefit trust or qualified
group legal services plan as described in sections 501(c)(7), (9), (17) or (20)
of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
For a discussion of the taxation of APF, see "Federal Income Tax
Considerations--Taxation of APF" in the consent solicitation.
S-20
<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 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 2,307,364 1,391,466 8,137 (2,450,663)(b),(c)
Interest and
Other Income..... 2,214,763 0 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 0 1,095,269 2,563,714 1,323,577 64,186 (377,734)(e)
Management and
Advisory Fees.... 697,364 0 697,364 0 0 611,196 (1,308,560)(f)
Fees to Related
Parties.......... 0 0 0 23,326 292,575 0 (292,786)(g)
Interest
Expense.......... 0 0 0 50,730 0 4,769,268 0
State Taxes...... 235,208 0 235,208 0 0 0 0
Depreciation--
Other............ 0 0 0 39,581 26,238 0 0
Depreciation--
Property......... 1,548,813 349,465(a) 1,898,278 0 0 0 0
Amortization..... 7,368 0 7,368 0 0 0 544,049 (h)
Transaction
Costs............ 125,926 0 125,926 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
Total Expenses.. 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650 (1,435,031)
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) $ (953,564)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 0 17,271 0 0 0 0
Gain on Sale of
Properties....... 0 0 0 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 (215,797) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
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) (953,564)
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) $(1,202,243)
=========== ========== =========== ========== ========== ========== ===========
<CAPTION>
Historical Acquisition
Combined CNL Income Pro Forma Adjusted
APF Fund, Ltd. Adjustments Pro Forma
------------ ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $14,523,161 $ 233,666 $ 5,535 (j) $14,762,362
Fees............. 1,256,304 0 (8,948)(k) 1,247,356
Interest and
Other Income..... 7,687,325 1,598 0 7,688,923
------------ ---------- ------------------ ------------
Total Revenue... $23,466,790 $235,264 $ (3,413) $23,698,641
Expenses:
General and
Administrative... 4,669,012 25,032 (14,874)(l),(m) 4,679,170
Management and
Advisory Fees.... 0 0 0 (n) 0
Fees to Related
Parties.......... 23,115 0 0 23,115
Interest
Expense.......... 4,819,998 0 0 4,819,998
State Taxes...... 235,208 5,667 2,361 (o) 243,236
Depreciation--
Other............ 65,819 0 0 65,819
Depreciation--
Property......... 1,898,278 50,805 32,603 (p) 1,981,686
Amortization..... 551,417 625 0 552,042
Transaction
Costs............ 125,926 31,116 0 157,042
------------ ---------- ------------------ ------------
Total Expenses.. 12,388,773 113,245 20,090 12,522,108
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties, and
Provision for
Losses on
Properties....... $11,078,017 $ 122,019 $ (23,503) $11,176,533
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 23,890 (2,782)(q) 38,379
Gain on Sale of
Properties....... 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 0 (215,797)
------------ ---------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/
(Provision) for
Federal Income
Taxes............ 10,879,491 145,909 (26,285) 10,999,115
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ---------- ------------------ ------------
Net
Earnings(Losses).. $10,879,491 $ 145,909 $ (26,285) $10,999,115
============ ========== ================== ============
</TABLE>
S-21
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
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
============ =========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 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
============ =========== ============ ========== ========== ============ ===========
Weighted average
units
outstanding
during period... n/a n/a n/a n/a n/a n/a n/a
============ =========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,401 n/a 37,347,401 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 n/a 37,348,464 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... 14,237,405 n/a n/a n/a n/a n/a n/a
Cash
distributions
declared per
$10,000
Investment...... 191 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 $ -- $ -- $ -- $ 0
Mortgages/notes
receivable...... $ 41,269,740 0 $ 41,269,740 $ -- $ -- $247,896,287 $ 0
Receivables,
net............. $ 548,862 0 $ 548,862 $7,141,967 $5,457,493 $ 1,969,339 (148,629)(w)
Investment
in/due from
joint ventures.. $ 1,083,564 0 $ 1,083,564 $ -- $ -- $ -- 0
Total assets.... $708,694,145 $33,656,518(u) $742,350,663 $8,223,820 $6,308,406 $264,700,433 $30,800,188 (v1),(w)
Total liabilities/
minority
interest........ $ 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 $31,220,558 (v1),(x)
<CAPTION>
Historical Acquisition
Combined CNL Income Pro Forma Adjusted
APF Fund, Ltd. Adjustments Pro Forma
-------------- ---------- -------------------- ------------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 542 17 n/a 559
============== ========== ==================== ==================
Earnings per
share/unit...... $ n/a 4.86 $ n/a $ n/a
============== ========== ==================== ==================
Book value per
share/unit...... $ n/a $ 273.53 $ n/a $ 16.27
============== ========== ==================== ==================
Dividends per
share/unit...... $ n/a $ 8.90 $ n/a $ n/a
============== ========== ==================== ==================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 3.15x
============== ========== ==================== ==================
Weighted average
units
outstanding
during period... n/a 30,000 n/a n/a
============== ========== ==================== ==================
Weighted average
shares
outstanding
during period... 43,497,401 n/a 570,980 44,068,381 (r)
============== ========== ==================== ==================
Shares
outstanding..... 43,498,464 n/a 570,980 44,069,444
============== ========== ==================== ==================
Cash
distributions
declared:....... n/a 266,982 n/a $ 19,120,281 (s)
==================
Cash
distributions
declared per
$10,000
Investment...... n/a 178 n/a $ 217 (u)
==================
Balance sheet
data:
Real estate
assets, net..... $ 647,547,023 $7,523,383 $3,814,284 (v2) $ 658,884,690
Mortgages/notes
receivable...... $ 289,166,027 $ -- $ 0 $ 289,166,027
Receivables,
net............. $ 14,969,032 $ 7,883 $ (126,196)(y) $ 14,850,719
Investment
in/due from
joint ventures.. $ 1,083,564 $ 836,967 $ 537,368(v2) $ 2,457,899
Total assets.... $1,052,383,510 $8,657,255 $3,087,449 (v2),(y) $1,064,128,214
Total liabilities/
minority
interest........ 346,929,801 $ 451,309 $ (126,196)(y) $ 347,254,914
Total equity.... $ 705,453,709 $8,205,946 $3,213,645 (v2) $ 716,873,300
</TABLE>
S-22
<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
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<CAPTION>
<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 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
</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>
<CAPTION>
<S> <C>
Management fees $ (697,364)
Administrative executive and guaranteefees (290,036)
Servicing fees (257,767)
Advisory fees (63,393)
------------
$(1,308,560)
============
</TABLE>
(g) Represents the elimination of $292,786 in fees between the Advisor and
the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
(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 $535,157
</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.
S-23
<PAGE>
(j) Represents $5,535 in accrued rental income resulting from the straight-
lining of scheduled rent increases throughout the lease terms for the
leases acquired from the Income Fund as if the leases had been acquired
on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<CAPTION>
<S> <C>
Management fees $ (9,001)
Reimbursement of administrative costs (16,728)
---------
$(25,729)
=========
</TABLE>
(l) Represents the elimination of $8,948 in administrative costs reimbursed
by the Income Fund to the Advisor.
(m) Represents savings of $5,926 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports
for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income Fund
to the Advisor.
(o) Represents additional state income taxes of $8,812 resulting from
assuming that acquisitions of properties that had been operational when
APF acquired them from January 1, 1999 through May 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 Fund 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 $32,603 as a result
of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated using
the straight-line method over the remaining useful lives of the
properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $2,782
as a result of adjusting the historical basis of the real estate owned
by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings owned indirectly by the
Income Fund is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(r) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 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.
S-24
<PAGE>
(v) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Income Fund Total
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Shares Offered 3,800,000 2,350,000 570,979.55 6,720,979.55
Exchange Value $20 $20 $20 $20
----------- ----------- ----------- ------------
Share Consideration $76,000,000 $47,000,000 $11,419,591 $134,419,591
Cash Consideration -- -- 158,000 158,000
APF Transaction Costs 6,044,305 3,737,925 920,770 10,703,000
----------- ----------- ----------- ------------
Total Purchase Price $82,044,305 $50,737,925 $12,498,361 $145,280,591
=========== =========== =========== ============
Allocation of Purchase
Price:
----------------------
Net Assets Historical $ 7,141,252 $10,006,878 $ 8,205,946 $ 25,354,076
Purchase Price
Adjustments:
Land and buildings on
operating leases 3,038,912 3,038,912
Net investment in
direct financing
leases 775,372 775,372
Investment in joint
ventures 537,368 537,368
Accrued rental income (29,747) (29,747)
Intangibles and other
assets (2,792,876) (29,490) (2,822,366)
Goodwill* 43,523,923 -- 43,523,923
Excess purchase price 74,903,053 -- -- 74,903,053
----------- ----------- ----------- ------------
Total Allocation $82,044,305 $50,737,925 $12,498,361 $145,280,591
=========== =========== =========== ============
</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 pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $74,903,053 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 43,523,923 relating to the acquisition
of the CNL Financial Services Group is being amortized over 20 years. APF
did not acquire any intangibles as part of any of the acquisitions. The
entries were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1. Common Stock (CFA, CFS, CFC)--Class A 8,600
Common Stock (CFA, CFS, CFC)--Class B 4,825
APIC (CFA, CFS, CFC) 13,857,645
Retained Earnings 3,277,060
Accumulated distributions in excess of earnings 74,903,053
Goodwill for CFC (Intangibles and other assets) 43,523,923
CFC/CFS Org Costs/Other Assets 2,792,876
Cash to pay APF transaction costs 9,782,230
APF Common Stock 61,500
APF APIC 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital 8,205,946
Land and buildings on operating leases 3,038,912
Net investment in direct financing leases 775,372
Investment in joint ventures 537,368
Accrued rental income 29,747
Intangibles and other assets 29,490
Cash to pay APF Transaction costs 920,770
Cash consideration to Income Funds 158,000
APF Common Stock 5,710
APF APIC 11,413,881
(To record acquisition of your Income Fund)
</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 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.
(y) Represents the elimination by the Income Fund of $126,196 in related
party payables recorded as receivables by the Advisor.
S-25
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND, LTD.
The following table sets forth certain financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund,
Ltd." in this supplement.
<TABLE>
<CAPTION>
Quarter Ended
March 31, Year Ended December 31,
--------------------- -------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 259,154 $ 297,611 $1,153,824 $1,333,000 $1,389,308 $1,290,567 $ 1,358,871
Net income (2).......... 145,909 213,539 1,001,437 1,248,757 1,083,109 962,102 1,208,576
Cash distributions
declared (3)........... 266,982 316,221 1,703,468 1,264,884 1,264,884 1,264,883 2,279,123
Net income per unit
(2).................... 4.82 7.05 33.09 41.24 35.75 31.75 39.91
Cash distributions
declared per unit (3).. 8.90 10.54 56.78 42.16 42.16 42.16 75.97
GAAP book value per
unit .................. 273.53 297.55 277.57 300.97 301.51 307.57 317.66
Weighted average number
of Limited Partner
units outstanding...... 30,000 30,000 30,000 30,000 30,000 30,000 30,000
<CAPTION>
March 31, December 31,
--------------------- -------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $8,657,255 $9,407,583 $8,760,926 $9,500,078 $9,479,777 $9,668,878 $10,857,414
Total partners'
capital................ 8,205,946 8,926,368 8,327,019 9,029,050 9,045,177 9,226,952 9,529,733
</TABLE>
- --------
(1) Revenues include equity in earnings of joint ventures.
(2) Net income for the years ended December 31, 1998, 1997 and 1996, includes
$235,804, $233,183 and $19,000, respectively, from gains on sale of land
and buildings.
(3) Distributions for the years ended December 31, 1998 and 1994 include
$586,300 and $861,500, respectively, as a result of the distribution of a
portion of the net sales proceeds from the sales of restaurant properties.
S-26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
November 26, 1985, to acquire for cash, either directly or through joint
venture arrangements, both newly constructed and existing restaurant
properties, as well as land upon which restaurants were to be constructed,
which are leased primarily to operators of national and regional fast-food
restaurant chains. The leases generally are triple-net leases, with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of 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.
S-27
<PAGE>
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
S-28
<PAGE>
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
S-29
<PAGE>
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
S-30
<PAGE>
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."
S-31
<PAGE>
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.
S-32
<PAGE>
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
S-33
<PAGE>
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.
S-34
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998...... F-1
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998.................................................................... F-2
Condensed Statements of Partner's Capital for the Quarter Ended March 31,
1999 and for the Year Ended December 31, 1998........................... F-3
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998................................................................ F-4
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998........................................................... F-5
Report of Independent Accountants........................................ F-6
Balance Sheets as of December 31, 1998 and 1997.......................... F-7
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-8
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-9
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-10
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-11
Unaudited Pro Forma Financial Information................................ F-19
Unaudited Pro Forma Balance Sheet as of March 31, 1999................... F-20
Unaudited Pro Forma Statement of Earnings for the Quarter Ended March 31,
1999.................................................................... F-22
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998.................................................................... F-24
Unaudited Pro Forma Statement of Cash Flows for the Quarter Ended March
31, 1999................................................................ F-26
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................ F-28
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements.............................................................. F-30
</TABLE>
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
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-1
<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-2
<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-3
<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-4
<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. 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-5
<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-6
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less accumulated
depreciation........................................... $7,574,188 $8,185,465
Investment in and due from joint ventures............... 841,379 919,476
Cash and cash equivalents............................... 252,521 184,130
Restricted cash......................................... -- 129,257
Receivables, less allowance for doubtful accounts of
$3,092 in 1997......................................... 30,959 21,331
Prepaid expenses........................................ 5,463 4,989
Lease costs, less accumulated amortization of $24,375
and $21,875............................................ 25,625 28,125
Accrued rental income................................... 30,791 27,305
---------- ----------
$8,760,926 $9,500,078
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable........................................ $ 736 $ 2,595
Escrowed real estate taxes payable...................... 1,024 734
Distributions payable................................... 266,982 316,221
Due to related parties.................................. 129,060 115,741
Rents paid in advance and deposits...................... 36,105 35,737
---------- ----------
Total liabilities..................................... 433,907 471,028
Partners' capital....................................... 8,327,019 9,029,050
---------- ----------
$8,760,926 $9,500,078
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $1,015,292 $1,038,443 $1,115,530
Contingent rental income................... 22,193 22,205 56,409
Interest and other income.................. 21,087 22,210 101,293
---------- ---------- ----------
1,058,572 1,082,858 1,273,232
---------- ---------- ----------
Expenses:
General operating and administrative....... 87,080 86,780 92,462
Professional services...................... 17,110 12,772 13,262
Real estate taxes.......................... 3,969 3,929 4,009
State and other taxes...................... 4,450 5,138 5,260
Depreciation and amortization.............. 268,260 208,807 210,206
Transaction costs.......................... 7,322 -- --
---------- ---------- ----------
388,191 317,426 325,199
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures and Gain on Sale of Land and
Buildings................................... 670,381 765,432 948,033
Equity in Earnings of Joint Ventures......... 95,252 250,142 116,076
Gain on Sale of Land and Buildings........... 235,804 233,183 19,000
---------- ---------- ----------
Net Income................................... $1,001,437 $1,248,757 $1,083,109
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 8,671 $ 11,577 $ 10,641
Limited partners........................... 992,766 1,237,180 1,072,468
---------- ---------- ----------
$1,001,437 $1,248,757 $1,083,109
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 33.09 $ 41.24 $ 35.75
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................... 30,000 30,000 30,000
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $ 193,400 $106,141 $13,314,525 $(13,429,078) $10,705,104 $(1,663,140) $ 9,226,952
Distributions to
limited partners
($42.16 per limited
partner unit)......... -- -- -- (1,264,884) -- -- (1,264,884)
Net income............. -- 10,641 -- -- 1,072,468 -- 1,083,109
--------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 193,400 116,782 13,314,525 (14,693,962) 11,777,572 (1,663,140) 9,045,177
Distributions to
limited partners
($42.16 per limited
partner unit)......... -- -- -- (1,264,884) -- -- (1,264,884)
Net income............. -- 11,577 -- -- 1,237,180 -- 1,248,757
--------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 193,400 128,359 13,314,525 (15,958,846) 13,014,752 (1,663,140) 9,029,050
Distributions to
limited partners
($44.45 per limited
partner unit)......... -- -- (369,939) (1,333,529) -- -- (1,703,468)
Net income............. -- 8,671 -- -- 992,766 -- 1,001,437
--------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $ 193,400 $137,030 $12,944,586 $(17,292,375) $14,007,518 $(1,663,140) $ 8,327,019
========= ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants................ $1,030,115 $1,227,883 $1,096,290
Distributions from joint ventures......... 113,770 152,019 133,296
Cash paid for expenses.................... (131,054) (84,642) (106,546)
Interest received......................... 20,958 21,556 9,648
---------- ---------- ----------
Net cash provided by operating
activities............................. 1,033,789 1,316,816 1,132,688
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
buildings............................... 661,300 793,009 20,000
Additions to land and building........... -- (863,135) --
Return of capital from joint venture..... -- 472,373 --
Investment in joint venture.............. -- (303,419) --
Decrease (increase) in restricted cash... 126,009 (126,009) --
---------- ---------- ----------
Net cash provided by (used in) investing
activities............................. 787,309 (27,181) 20,000
---------- ---------- ----------
Cash Flows from Financing Activities:
Proceeds from loan from corporate
general partner......................... -- 133,000 83,100
Repayment of loan from corporate general
partner................................. -- (133,000) (83,100)
Distributions to limited partners........ (1,752,707) (1,264,884) (1,264,884)
---------- ---------- ----------
Net cash used in financing activities... (1,752,707) (1,264,884) (1,264,884)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... 68,391 24,751 (112,196)
Cash and Cash Equivalents at Beginning of
Year...................................... 184,130 159,379 271,575
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $ 252,521 $ 184,130 $ 159,379
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income................................ $1,001,437 $1,248,757 $1,083,109
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.............................. 206,181 206,307 207,706
Amortization.............................. 62,079 2,500 2,500
Equity in earnings of joint ventures, net
of distributions......................... 18,518 (98,123) 17,220
Gain on sale of land and buildings........ (235,804) (233,183) (19,000)
Decrease (increase) in receivables........ (6,380) 158,360 (151,105)
Increase in prepaid expenses.............. (474) (524) (650)
Decrease (increase) in accrued rental
income................................... (3,486) (3,706) 1,234
Increase (decrease) in accounts payable
and accrued expenses..................... (1,569) 673 (11,712)
Increase (decrease) in due to related
parties.................................. (7,081) 20,729 19,873
Increase (decrease) in rents paid in
advance and deposits..................... 368 15,026 (16,487)
---------- ---------- ----------
Total adjustments....................... 32,352 68,059 49,579
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $1,033,789 $1,316,816 $1,132,688
========== ========== ==========
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Deferred real estate disposition fee
incurred and unpaid at end of year....... $ 20,400 $ -- $ --
========== ========== ==========
Distributions declared and unpaid at
December 31.............................. $ 266,982 $ 316,221 $ 316,221
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food restaurant
chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are generally leased to unrelated third parties on a triple-net
basis, whereby the tenant is generally responsible for all operating expenses
relating to the property, including property taxes, insurance, maintenance and
repairs. The leases are accounted for using the operating method. Under the
operating method, land and building leases are recorded at cost, revenue is
recognized as rentals are earned and depreciation is charged to operations as
incurred. Buildings are depreciated on the straight-line method over their
estimated useful lives of 30 years. When scheduled rentals vary during the
lease term, income is recognized on a straight-line basis so as to produce a
constant periodic rent over the lease term commencing on the date the property
is placed in service.
Accrued rental income represents the aggregate amount of income recognized
on a straight-line basis in excess of scheduled rental payments to date.
Whenever a tenant defaults under the terms of its lease or events or changes in
circumstances indicate that the tenant will not lease the property through the
end of the lease term, the Partnership either reserves or writes-off the
cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
plus any accrued rental income, will be removed from the accounts and gains or
losses from sales will be reflected in income. The general partners of the
Partnership review the properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through operations. The general partners determine whether an
impairment in value has occurred by comparing the estimated future undiscounted
cash flows, including the residual value of the property, with the carrying
cost of the individual property. If an impairment is indicated, the assets are
adjusted to their fair value. Although the general partners have made their
best estimate of these factors based on current conditions, it is reasonable
possible that changes could occur in the near term which could adversely affect
the general partners' best estimate of net cash flows expected to be generated
from its properties and the need for asset impairment write downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership continues to pursue collection of such amounts. If amounts are
subsequently determined to be uncollectible, the corresponding receivable and
the allowance for doubtful accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership's investments in Sand Lake
Road Joint Venture, Orange Avenue Joint Venture, and a property in Vancouver,
Washington, held as tenants-in-common with affiliates, are accounted for using
the equity method since the Partnership shares control with affiliates which
have the same general partners.
F-11
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Lease Costs--Lease incentive costs and brokerage and legal fees associated
with negotiating new leases are amortized over the terms of the new leases
using the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
2. Leases:
The Partnership leases its land and buildings primarily to operators of
national and regional fast-food restaurants. The leases are accounted for under
the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." The leases have been classified as operating leases.
Substantially all leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant generally pays all property taxes
and assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew the
leases for two or three successive five-year periods subject to the same terms
and conditions as the initial lease. Most leases also allow the tenant to
purchase the property at fair market value after a specified portion of the
lease has elapsed.
F-12
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................... $ 3,759,766 $ 3,999,700
Buildings.......................................... 6,092,049 6,358,678
----------- -----------
9,851,815 10,358,378
Less accumulated depreciation...................... (2,277,627) (2,172,913)
----------- -----------
$ 7,574,188 $ 8,185,465
=========== ===========
</TABLE>
In August 1997, the Partnership sold its property in Casa Grande, Arizona,
to a third party for $840,000 and received net sales proceeds of $793,009,
resulting in a gain of $233,183 for financial reporting purposes. This property
was originally acquired by the Partnership in December 1986 and had a cost of
approximately $667,300, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $128,400 in excess of its original purchase price. In October
1997, the Partnership reinvested the majority of the net sales proceeds in a
property located in Camp Hill, Pennsylvania.
During the year ended December 31, 1998, the Partnership sold its property
in Kissimmee, Florida for $680,000 and received net sales proceeds of $661,300
resulting in a gain of $235,804 for financial reporting purposes. This property
was originally acquired by the Partnership in 1987 and had a cost of
approximately $475,400, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold this property for
approximately $185,900 in excess of its original purchase price. In connection
with the sale, the Partnership incurred a deferred, subordinated, real estate
disposition fee of $20,400 (See Note 8).
Certain leases provide for escalating guaranteed minimum rents throughout
the lease terms. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998 and 1997, the Partnership recognized $3,486 and $3,706, respectively,
of such income. For the year ended December 31, 1996, rental payments received
exceeded the rental income recognized on a straight-line basis by $1,234.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999.............................................................. $ 894,752
2000.............................................................. 894,405
2001.............................................................. 870,528
2002.............................................................. 457,415
2003.............................................................. 456,511
Thereafter........................................................ 4,013,686
----------
$7,587,297
==========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
F-13
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
4. Investment in Joint Ventures:
In August 1997, Seventh Avenue Joint Venture, in which the Partnership owned
a 50 percent interest, sold its property to its tenant for $950,000, and
received net sales proceeds of $944,747, resulting in a gain to the joint
venture of approximately $295,100 for financial reporting purposes. The
property was originally acquired by Seventh Avenue Joint Venture in June 1986
and had a total cost of approximately $770,000, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the joint venture sold the
property for approximately $177,400 in excess of its original purchase price.
During 1997, as a result of the sale of the property, the joint venture was
dissolved in accordance with the joint venture agreement. As a result, the
Partnership received approximately $472,400, representing its pro-rata share of
the net sales proceeds received by the joint venture.
In December 1997, the Partnership acquired a property in Vancouver,
Washington, as tenants-in-common with affiliates of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with an affiliate, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 12.17% interest in this property.
As of December 31, 1998, the Partnership had a 50 percent interest in the
profits and losses of Orange Avenue Joint Venture and Sand Lake Road Joint
Venture, and owned a 12.17% interest in a property in Vancouver, Washington, as
tenants-in-common. These joint ventures, and the Partnership and affiliates, as
tenants-in-common, each own and lease one property to an operator of national
fast-food or family-style restaurants. The following presents the combined,
condensed financial information for the joint ventures and the property held as
tenants-in-common with affiliates at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less accumu-
lated depreciation................................. $3,261,368 $3,338,774
Cash................................................ 1,354 1,636
Prepaid expenses.................................... 219 --
Accrued rental income............................... 23,087 --
Liabilities......................................... 1,619 1,677
Partners' capital................................... 3,284,409 3,338,733
Revenues............................................ 420,677 246,236
Gain on sale of land and building................... -- 295,080
Net income.......................................... 340,503 500,285
</TABLE>
The Partnership recognized income totaling $95,252, $250,142 and $116,076
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
5. Restricted Cash:
As of December 31, 1997, the remaining net sales proceeds of $126,009 from
the sale of the property in Casa Grande, Arizona, plus accrued interest of
$3,248, were being held in an interest-bearing escrow account pending the
release of funds by the escrow agent to acquire an additional property or use
for other Partnership purposes. During 1998, the funds were returned to the
Partnership and used to pay distributions to the limited partners.
F-14
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
6. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, noncumulative, noncompounded annual
return on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their cumulative
10% Preferred Return, plus the return of their adjusted capital contributions.
The general partners will then receive, to the extent previously subordinated
and unpaid, a one percent interest in all prior distributions of net cash flow
and a return of their capital contributions. Any remaining sales proceeds will
be distributed 95 percent to the limited partners and five percent to the
general partners. Any gain from the sale of a property not in liquidation of
the Partnership is, in general, allocated in the same manner as net sales
proceeds are distributable. Any loss from the sale of a property is, in
general, allocated first, on a pro rata basis, to partners with positive
balances in their capital accounts; and thereafter, 95 percent to the limited
partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital account balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the year ended December 31, 1998, the Partnership declared
distributions to the limited partners of $1,703,468, and during each of the
years ended December 31, 1997 and 1996, the Partnership declared distributions
to the limited partners of $1,264,884. Distributions for the year ended
December 31, 1998, included $586,300 in a special distribution, as a result of
the distribution of net sales proceeds from the sale of the property in
Kissimmee, Florida. This special distribution was effectively a return of a
portion of the limited partners' investment, although, in accordance with the
Partnership agreement, $216,361 was applied toward the limited partners' 10%
Preferred Return and the balance of $369,939 was treated as a return of capital
for purposes of calculating the limited partners' 10% Preferred Return. As a
result of the return of capital, and the returns of capital in prior years, the
amount of the limited partners' invested capital contributions (which generally
is the limited partners' capital contributions, less distributions from the
sale of a property that are considered to be a return of capital) was
decreased; therefore, the amount of the limited partners' invested capital
contributions on which the 10% Preferred Return is calculated was lowered
accordingly. As a result of the sale of the property during 1998, the
Partnership's total revenue was reduced, while the majority of the
Partnership's operating expenses remained fixed. Therefore, distributions of
net cash flow were adjusted during the quarter ended June 30, 1998. No
distributions have been made to the general partners to date.
F-15
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
7. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $1,001,437 $1,248,757 $1,083,109
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (87,967) (104,279) (108,995)
Gain on sale of land and buildings for
financial reporting purposes less than
(in excess of) gain for tax reporting
purposes............................... 58,632 (233,183) --
Equity in earnings of joint ventures for
financial reporting purposes less than
(in excess of) equity in earnings of
joint ventures for tax reporting
purposes............................... 49,058 (18,410) (17,987)
Capitalization of transaction costs for
tax reporting purposes................. 7,322 -- --
Accrued rental income................... (3,486) (3,706) 1,234
Rents paid in advance................... 368 15,026 (16,487)
Allowance for doubtful accounts......... (3,091) 1,679 (120,724)
---------- ---------- ----------
Net income for federal income tax
purposes............................... $1,022,273 $ 905,884 $ 820,150
========== ========== ==========
</TABLE>
8. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. James M. Seneff, Jr. is director, chairman of the board of
directors and chief executive officer of CNL Fund Advisors, Inc. The other
individual general partner, Robert A. Bourne, serves as treasurer, director and
vice chairman of the board of CNL Fund Advisors, Inc. During the years ended
December 31, 1998, 1997, and 1996, CNL Fund Advisors, Inc. (hereinafter
referred to as the "Affiliate") performed certain services for the Partnership,
as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a property
management agreement with the Partnership. In connection therewith, the
Partnership agreed to pay the Affiliate an annual, noncumulative, subordinated
property management fee of one-half of one percent of the Partnership assets
under management (valued at cost) annually. The property management fee is
limited to one percent of the sum of gross operating revenues from properties
wholly owned by the Partnership and the Partnership's allocable share of gross
operating revenues from joint ventures or competitive fees for comparable
services. In addition, these fees will be incurred and will be payable only
after the limited partners receive their aggregate, noncumulative 10% Preferred
Return. Due to the fact that these fees are noncumulative, if the limited
partners do not receive their 10% Preferred Return in any particular year, no
management fees will be due or payable for such year. As a result of such
threshold, no management fees were incurred during the years ended December 31,
1998, 1997, and 1996.
The Affiliate is entitled to receive a deferred, subordinated real estate
disposition fee, payable upon the sale of one or more properties based on the
lesser of one-half of a competitive real estate commission or three percent of
the sales price if the Affiliate provides a substantial amount of services in
connection with the sale. However, if the net sales proceeds are reinvested in
a replacement property, no such real estate disposition fees
F-16
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
will be incurred until such replacement property is sold and the net sales
proceeds are distributed. Payment of the real estate disposition fee is
subordinated to receipt by the limited partners of the 10% Preferred Return on
a cumulative basis, plus their adjusted capital contributions. For the year
ended December 31, 1998, the Partnership incurred $20,400 in a deferred,
subordinated real estate disposition fee as a result of the sale of a property
(See Note 3). No deferred, subordinated real estate disposition fees were
incurred for the years ended December 31, 1997 and 1996.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $63,981, $57,679 and $67,685 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Due to CNL Fund Advisors, Inc. and its affiliates:
Deferred, subordinated real estate disposition fee....... $ 87,150 $ 66,750
Expenditures incurred on behalf of the Partnership....... 15,123 17,902
Accounting and administrative services................... 26,787 31,089
-------- --------
$129,060 $115,741
======== ========
</TABLE>
The deferred, subordinated real estate disposition fees are the result of
the Partnership's sale of one property during 1998 and two properties in prior
years. These fees will not be paid until after the limited partners have
received their cumulative 10% Preferred Return, plus their adjusted capital
contributions, as described above.
9. Concentration of Credit Risk:
The following schedule presents total rental income from individual lessees,
each representing more than ten percent of the Partnership's total rental
income (including the Partnership's share of rental income from joint ventures
and the property held as tenants-in-common with an affiliate), for each of the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation........................ $452,653 $452,653 $452,653
Wendy's International, Inc....................... N/A 164,857 212,322
Restaurant Management Services, Inc.............. N/A 128,737 129,633
</TABLE>
In addition, the following schedule presents total rental income from
individual restaurant chains, each representing more than ten percent of the
Partnership's total rental income (including the Partnership's share of rental
income from joint ventures and the property held as tenant-in-common with an
affiliate), for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants..... $452,653 $452,653 $452,653
Wendy's Old Fashioned Hamburger Restaurants..... 352,330 443,335 507,642
Popeyes Famous Fried Chicken.................... N/A 128,737 129,633
</TABLE>
F-17
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
10. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 1,157,759 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $11,384,042 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
11. Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 10 being adjusted to 578,880 shares valued at $20.00 per
APF share.
F-18
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of the Advisor
and the CNL Restaurant Financial Services Group, and the acquisition of the
Income Fund (the acquisition of the Income Fund is referred to as the
"Acquisition"), and is based on estimates and assumptions set forth below in
the notes to such information which included pro forma adjustments. This
unaudited pro forma financial information has been prepared utilizing the
historical financial statements of APF, the historical combined financial
information of the Income Fund, the Advisor and CNL Restaurant Financial
Services Group (shown separately as CFS and CFC) and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, Income Fund, Advisor and CNL Restaurant Financial Services Group. The
pro forma balance sheet assumes that the Acquisition occurred on 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.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-19
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of March 31, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------ ------------ ------------ ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... 475,787,661 58,749,637 (A) 534,537,298 0 0 0
Net Investment in Direct
Financing Leases....... 123,270,117 0 123,270,117 0 0 0
Mortgages and Notes
Receivable............. 41,269,740 0 41,269,740 0 0 247,896,287
Other Investments....... 16,199,792 0 16,199,792 0 0 6,353,482
Investment In Joint
Ventures............... 1,083,564 0 1,083,564 0 0 0
Cash and Cash
Equivalents............ 35,796,119 (25,093,119) (A) 10,703,000 591,712 552,415 4,896,688
Restricted
Cash/Certificates of
Deposit................ 2,007,278 0 2,007,278 0 0 853,243
Receivables (net
allowances)/Due from
Related Party.......... 548,862 0 548,862 7,141,967 5,457,493 1,969,339
Accrued Rental Income... 5,007,334 0 5,007,334 0 0 0
Other Assets............ 7,723,678 0 7,723,678 490,141 298,498 2,731,394
Goodwill................ 0 0 0 0 0 0
------------ ------------ ------------ ---------- ---------- ------------
Total Assets........... $708,694,145 $ 33,656,518 $742,350,663 $8,223,820 $6,308,406 $264,700,433
============ ============ ============ ========== ========== ============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 3,464,190 $ 0 $ 3,464,190 $ 576,531 $ 304,375 $ 1,613,959
Accrued Construction
Costs Payable.......... 10,172,169 0 10,172,169 0 0 0
Distributions Payable... 0 0 0 119,808 0 0
Due to Related Parties.. 148,629 0 148,629 0 563,724 31,310,681
Income Tax Payable...... 0 0 0 0 0 271,741
Line of Credit/Notes
payable................ 34,150,000 33,656,518 (A) 67,806,518 386,229 0 226,937,481
Deferred Income......... 2,052,530 0 2,052,530 0 0 0
Rents Paid in Advance... 1,340,636 0 1,340,636 0 0 0
Minority Interest....... 280,970 0 280,970 0 0 0
Common Stock............ 373,843 0 373,843 0 0 0
Common Stock--Class A... 0 0 0 6,400 2,000 200
Common Stock--Class B... 0 0 0 3,600 724 501
Additional Paid-in-
capital................ 670,005,177 0 670,005,177 4,617,047 5,303,503 3,937,095
Accumulated
distributions in excess
of net earnings........ (13,293,639) 0 (13,293,639) 2,514,205 134,080 628,775
Partners Capital........ 0 0 0 0 0 0
------------ ------------ ------------ ---------- ---------- ------------
Total Liabilities and
Equity................ $708,694,145 $ 33,656,518 $742,350,663 $8,223,820 $6,308,406 $264,700,433
============ ============ ============ ========== ========== ============
</TABLE>
F-20
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of March 31, 1999
<TABLE>
<CAPTION>
Combining
Pro Forma Combined Historical CNL Pro Forma Adjusted
Adjustments APF Income Fund, Ltd. Adjustments Pro Forma
------------ -------------- ----------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... 0 534,537,298 7,523,383 3,038,912 (B2) 545,099,593
Net Investment in Direct
Financing Leases....... 0 123,270,117 -- 775,372 (B2) 124,045,489
Mortgages and Notes
Receivable............. 0 289,166,027 -- 0 289,166,027
Other Investments....... 0 22,553,274 0 0 22,553,274
Investment In Joint
Ventures............... 0 1,083,564 836,967 537,368 (B2) 2,457,899
Cash and Cash
Equivalents............ (9,782,230) (B1) 6,961,585 229,785 (920,770) (B2) 6,112,600
(158,000) (B2)
Restricted
Cash/Certificates of
Deposit................ 0 2,860,521 -- 0 2,860,521
Receivables (net
allowances)/Due from
Related Party.......... (148,629) (C) 14,969,032 7,883 (126,196) (E) 14,850,719
Accrued Rental Income... 0 5,007,334 29,747 (29,747) (B2) 5,007,334
Other Assets............ (2,792,876) (B1) 8,450,835 29,490 (29,490) (B2) 8,450,835
Goodwill................ 43,523,923 (B1) 43,523,923 0 0 43,523,923
------------ -------------- ---------- ----------- --------------
Total Assets........... $ 30,800,188 $1,052,383,510 $8,657,255 $ 3,087,449 $1,064,128,214
============ ============== ========== =========== ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 0 $ 5,959,055 $ 36,201 $ 0 $ 5,995,256
Accrued Construction
Costs Payable.......... 0 10,172,169 0 0 10,172,169
Distributions Payable... 0 119,808 266,982 0 386,790
Due to Related Parties.. (148,629) (C) 31,874,405 126,196 (126,196) (E) 31,874,405
Income Tax Payable...... (271,741) (D) 0 0 0 0
Line of Credit/Notes
payable................ 0 295,130,228 0 0 295,130,228
Deferred Income......... 0 2,052,530 0 0 2,052,530
Rents Paid in Advance... 0 1,340,636 21,930 0 1,362,566
Minority Interest....... 0 280,970 0 0 280,970
5,710
Common Stock............ 61,500 (B1) 434,983 0 (B2) 440,693
Common Stock--Class A... (8,600) (B1) 0 0 0 0
Common Stock--Class B... (4,825) (B1) 0 0 0 0
Additional Paid-in-
capital................ 122,938,500 (B1) 792,943,677 0 11,413,881 (B2) 804,357,558
(13,857,645) (B1)
Accumulated
distributions in excess
of net earnings........ (3,277,060) (B1) (87,924,951) 0 0 (87,924,951)
(74,903,053) (B1)
271,741 (D)
Partners Capital........ 0 0 8,205,946 (8,205,946) (B2) 0
------------ -------------- ---------- ----------- --------------
Total Liabilities and
Equity................ $ 30,800,188 $1,052,383,510 $8,657,255 $ 3,087,449 $1,064,128,214
============ ============== ========== =========== ==============
</TABLE>
F-21
<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
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $12,184,008 2,339,153(a) $14,523,161 $ 0 $ 0 $ 0
Fees................... 0 0 0 2,307,364 1,391,466 8,137
Interest and Other
Income................ 2,214,763 0 2,214,763 47,213 129,362 5,233,919
----------- ---------- ----------- ---------- ---------- ----------
Total Revenue.......... $14,398,771 $2,339,153 $16,737,924 $2,354,577 $1,520,828 $5,242,056
Expenses:
General and
Administrative
Expenses.............. 1,095,269 0 1,095,269 2,563,714 1,323,577 64,186
Management and Advisory
Fees.................. 697,364 0 697,364 0 0 611,196
Fees Paid to Related
Parties............... 0 0 0 23,326 292,575 0
Interest Expense....... 0 0 0 50,730 0 4,769,268
State Taxes............ 235,208 0 235,208 0 0 0
Depreciation--Other.... 0 0 0 39,581 26,238 0
Depreciation--
Property.............. 1,548,813 349,465(a) 1,898,278 0 0 0
Amortization........... 7,368 0 7,368 0 0 0
Transaction Costs...... 125,926 0 125,926 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
Total Expenses......... 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, 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)
Equity Earnings of
Joint
Ventures/Minority
Interest ............. 17,271 0 17,271 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Provision For Loss on
Properties............ (215,797) 0 (215,797) 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
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)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 127,496 48,017 73,166
----------- ---------- ----------- ---------- ---------- ----------
Net Earnings (Losses)... $10,490,297 $1,989,688 $12,479,985 $ (195,278) $ (73,545) $ (129,428)
=========== ========== =========== ========== ========== ==========
Earnings Per
Share/Unit............. $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ==========
Book Value Per
Share/Unit............. $ 17.59 $ 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
=========== ========== =========== ========== ========== ==========
Ratio of Earnings to
Fixed Charges.......... 50.03x n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========== ==========
Wtd. Avg. Units
Outstanding............ 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
=========== ========== =========== ========== ========== ==========
Shares Outstanding...... 37,348,464 n/a 37,348,464 n/a n/a n/a
=========== ========== =========== ========== ========== ==========
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 Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For The Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Historical
Combining CNL
Pro Forma Combined Income Pro Forma Adjusted
Adjustments APF Fund, Ltd. Adjustments Pro Forma
----------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ 0 $14,523,161 $233,666 5,535 (j) $ 14,762,362
Fees................... (2,450,663)(b),(c) 1,256,304 0 (8,948)(k) 1,247,356
Interest and Other
Income................ 62,068 (d) 7,687,325 1,598 0 7,688,923
----------- ----------- -------- -------- ------------
Total Revenue.......... $(2,388,595) $23,466,790 $235,264 $ (3,413) $ 23,698,641
Expenses:
General and
Administrative
Expenses.............. (377,734)(e) 4,669,012 25,032 (14,874)(l),(m) 4,679,170
Management and Advisory
Fees.................. (1,308,560)(f) 0 0 0 (n) 0
Fees Paid to Related
Parties............... (292,786)(g) 23,115 0 0 23,115
Interest Expense....... 0 4,819,998 0 0 4,819,998
State Taxes............ 0 235,208 5,667 2,361 (o) 243,236
Depreciation--Other.... 0 65,819 0 0 65,819
Depreciation--
Property.............. 0 1,898,278 50,805 32,603 (p) 1,981,686
Amortization........... 544,049 (h) 551,417 625 0 552,042
Transaction Costs...... 0 125,926 31,116 0 157,042
----------- ----------- -------- -------- ------------
Total Expenses......... (1,435,031) 12,388,773 113,245 20,090 12,522,108
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties and
Provision for Losses on
Properties............. $(953,564) $11,078,017 $122,019 $(23,503) $ 11,176,533
Equity Earnings of
joint
Ventures/Minority
Interest ............. 0 17,271 23,890 (2,782)(q) 38,379
Gain on Sale of
Properties............ 0 0 0 0 0
Provision For Loss on
Properties............ 0 (215,797) 0 0 (215,797)
----------- ----------- -------- -------- ------------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (953,564) 10,879,491 145,909 (26,285) 10,999,115
Benefit/(Provision) for
Federal Income Taxes.. (248,679)(i) 0 0 0 0
----------- ----------- -------- -------- ------------
Net Earnings (Losses)... $(1,202,243) $10,879,491 $145,909 $(26,285) $ 10,999,115
=========== =========== ======== ======== ============
Earnings Per
Share/Unit............. $ n/a $ n/a $ 4.86 $ n/a $ 0.25
=========== =========== ======== ======== ============
Book Value Per
Share/Unit............. $ n/a $ n/a $ 273.53 $ n/a $ 16.27
=========== =========== ======== ======== ============
Dividends Per
Share/Unit............. $ n/a $ n/a $ 8.90 $ n/a $ n/a
=========== =========== ======== ======== ============
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.15x
=========== =========== ======== ======== ============
Wtd. Avg. Units
Outstanding............ n/a n/a 30,000 n/a n/a
=========== =========== ======== ======== ============
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,401 n/a 570,980 44,068,381(r)
=========== =========== ======== ======== ============
Shares Outstanding...... 6,150,000 43,498,464 n/a 570,980 44,069,443
=========== =========== ======== ======== ============
Calculation of Pro Forma
Distributions:
Pro Forma Cash from
Operations from
Statement of Cash
Flows.................. $(23,451,614)
Addback Pro Forma
Investments in Notes
Receivable............. 42,571,895
------------
Adjusted Pro Forma
Distributions Declared: $ 19,120,281(s)
============
Pro Forma Wtd. Avg.
Dollars Outstanding.... $881,367,612(t)
============
Pro Forma Cash
Distributions Declared
per $10,000
Investment............. $ 217(u)
============
</TABLE>
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 21,919,865(a) $55,049,526 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $21,919,865 $64,106,902 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 2,889,368(a) 6,931,658 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 2,889,368 12,298,325 11,435,228 7,966,916 25,677,829
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties and
Provision for Losses on
Properties............. $32,778,080 $19,030,497 $51,808,577 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Other Expenses......... 0 0 0 0 0 0
Provision For Loss on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
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
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $19,030,497 $51,182,905 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Units
Outstanding............ n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 8,158,114 34,806,333 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 34,757 37,372,684 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Calculation of Pro Forma
Distributions Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows.............
Addback Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable......
Addback Pro Forma
Investments in Notes
Receivable............
Adjusted Pro Forma
Distributions
Declared:..............
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund, Ltd. Adjustments Pro Forma
------------ ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ 0 $55,049,526 $1,037,485 22,141 (j) $ 56,109,152
Fees................... (32,715,768)(b),(c) 3,226,263 0 (19,424)(k) 3,206,839
Interest and Other
Income................ 207,144 (d) 32,221,925 21,087 0 32,243,012
------------ ----------- ---------- -------- -------------
Total Revenue.......... $(32,508,624) $90,497,714 $1,058,572 $ 2,717 $ 91,559,003
Expenses:
General and
Administrative........ (4,241,719)(e) 15,939,556 108,159 (45,732)(l),(m) 16,001,983
Management and Advisory
Fees.................. (4,658,434)(f) 0 0 0 (n) 0
Fees to Related
Parties............... (2,161,897)(g) 858,787 0 0 858,787
Interest Expense....... 0 21,498,589 0 0 21,498,589
State Taxes............ 0 567,446 4,450 3,559 (o) 575,455
Depreciation--Other.... 0 199,157 0 0 199,157
Depreciation--
Property.............. (340,898)(r) 6,590,760 206,181 130,410 (p) 6,927,351
Amortization........... 2,176,196 (h) 2,340,197 62,079 0 2,402,276
Transaction Costs...... 0 157,054 7,322 0 164,376
------------ ----------- ---------- -------- -------------
Total Expenses......... (9,226,752) 48,151,546 388,191 88,237 48,627,974
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties and
Provision for Losses on
Properties............. $(23,281,872) $42,346,168 $ 670,381 $(85,520) $ 42,931,029
Equity in Earnings of
Joint Venture/Minority
Interest.............. 0 (14,138) 95,252 (11,126)(q) 69,988
Gain on Sale of
Properties............ 0 0 235,804 0 235,804
Gain on
Securitization........ 0 3,694,351 0 0 3,694,351
Other Expenses......... 0 0 0 0 0
Provision For Loss on
Properties............ 0 (611,534) 0 0 (611,534)
------------ ----------- ---------- -------- -------------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (23,281,872) 45,414,847 1,001,437 (96,646) 46,319,638
Benefit/(Provision) for
Federal Income Taxes.. 6,898,434 (i) 0 0 0 0
------------ ----------- ---------- -------- -------------
Net Earnings (Losses)... $(16,383,438) $45,414,847 $1,001,437 $(96,646) $ 46,319,638
============ =========== ========== ======== =============
Earnings Per
Share/Unit............. $ n/a $ n/a $ 33.38 $ n/a $ 1.12
============ =========== ========== ======== =============
Book Value Per
Share/Unit............. $ n/a $ n/a $ 277.57 $ n/a $ 16.31
============ =========== ========== ======== =============
Dividends Per
Share/Unit............. $ n/a $ n/a $ 56.78 $ n/a $ n/a
============ =========== ========== ======== =============
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.10x
============ =========== ========== ======== =============
Wtd. Avg. Units
Outstanding............ n/a n/a 30,000 n/a n/a
============ =========== ========== ======== =============
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,956,333 n/a 570,980 41,527,313 (s)
============ =========== ========== ======== =============
Shares Outstanding...... 6,150,000 43,522,684 n/a 570,980 44,093,664
============ =========== ========== ======== =============
Calculation of Pro Forma
Distributions Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows............. $ 56,501,050
Addback Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable...... (265,871,668)
Addback Pro Forma
Investments in Notes
Receivable............ 288,590,674
-------------
Adjusted Pro Forma
Distributions
Declared:.............. $ 79,220,056 (t)
=============
Pro Forma Wtd. Avg.
Dollars Outstanding.... $ 830,546,257 (u)
=============
Pro Forma Cash
Distributions Declared
per $10,000
Investment............. $ 954 (v)
=============
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Historical
Property CNL Historical
Acquisition Financial CNL
Historical Pro Forma Historical Services, Financial
APF Adjustments Subtotal Advisor Inc. Corp.
------------ ------------ ------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)...... $ 10,490,297 $ 1,989,688 (a) $ 12,479,985 $ (195,278) $ (73,545) $ (129,428)
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation........... 1,548,813 349,465 (b) 1,898,278 39,581 0 0
Amortization expense... 7,368 0 7,368 0 26,238 424,697
Minority interest in
income of consolidated
joint venture......... 7,763 0 7,763 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 0 23,234 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 215,797 0 215,797 0 0 (73,166)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (82,660) 0 (82,660) (377,933) (242,251) (6,771)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (449,580)
Investment in notes
receivable............ 0 0 0 0 0 (42,571,895)
Collections on notes
receivable............ 0 0 0 0 0 6,417,907
Increase in restricted
cash.................. 0 0 0 0 0 (402,461)
Decrease in due from
related party......... 0 0 0 0 0 55,382
Decrease (increase) in
prepaid expenses...... 27,548 0 27,548 0 1,811 0
Decrease in net
investment in direct
financing leases...... 787,375 0 787,375 0 0 0
Increase in accrued
rental income......... (1,047,421) 0 (1,047,421) 0 0 0
Decrease (increase) in
intangibles and other
assets................ (30,554) 7,942
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 306,277 0 306,277 (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 0 71,853 25,550 0 0
Decrease in accrued
interest.............. 0 0 0 0 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 386,365 0 386,365 0 0 0
Increase (decrease) in
deferred rental
income................ 862,647 0 862,647 0 0 0
------------ ------------ ------------- ----------- --------- ------------
Total adjustments..... 3,114,959 349,465 3,464,424 (1,183,414) (344,708) (37,064,802)
------------ ------------ ------------- ----------- --------- ------------
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)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 0 0 0 0
Additions to land and
buildings on operating
leases................ (77,028,830) (58,749,637)(e) (135,778,467) (31,577) (10,092) 0
Investment in direct
financing leases...... (29,608,346) 0 (29,608,346) 0 0 0
Investment in joint
venture............... (117,662) 0 (117,662) 0 0 0
Aqcuisition of
businesses............ 0
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 134,981
Investment in mortgage
notes receivable...... (1,388,463) 0 (1,388,463) 0 0 0
Collections on mortgage
note receivable....... 75,010 0 75,010 0 0 0
Investment in notes
receivable............ (1,087,483) 0 (1,087,483) 0 0 0
Collection on notes
receivable............ 239,596 0 239,596 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... 0 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------ ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) investing
activities........... (108,916,178) (58,749,637) (167,665,815) (31,577) (10,092) 134,981
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,735 0 210,735 1,288,673 20,572 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,142,237) 0 (1,142,237) 0 0 0
Payment of stock
issuance costs........ (722,001) 0 (722,001) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 36,587,245 22,953,518 (e) 59,540,763 0 0 49,730,934
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (2,385) (10,291,473)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (8,610) 0 (8,610) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0 0
Distributions to
stockholders.......... (14,237,405) 0 (14,237,405) 0 0 0
Other.................. (200,234) 0 (200,234) 0 0 (9,602)
------------ ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) financing
activities........... 7,907,204 22,953,518 30,860,722 1,288,673 18,187 39,429,859
Net increase in cash... (87,403,718) (33,456,966) (120,860,684) (121,596) (410,158) 2,370,610
Cash at beginning of
year.................. 123,199,837 0 123,199,837 713,308 962,573 2,526,078
------------ ------------ ------------- ----------- --------- ------------
Cash at end of year.... $ 35,796,119 $(33,456,966) $ 2,339,153 $ 591,712 $ 552,415 4,896,688
============ ============ ============= =========== ========= ============
</TABLE>
F-26
<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>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund, Ltd. Adjustments Pro Forma
------------ ------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)...... $ (1,202,243)(a) $ 10,879,491 $ 145,909 $ (26,285)(a) $ 10,999,115
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation........... 0 1,937,859 50,805 32,603 (b) 2,021,267
Amortization expense... 544,049 (c) 1,002,352 625 0 1,002,977
Minority interest in
income of consolidated
joint venture......... 0 7,763 0 0 7,763
Equity in earnings of
joint ventures, net of
distributions......... 0 23,234 4,412 2,782 (d) 30,428
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 0 142,631 0 0 142,631
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (709,615) 23,076 0 (686,539)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (449,580) 0 0 (449,580)
Investment in notes
receivable............ 0 (42,571,895) 0 0 (42,571,895)
Collections on notes
receivable............ 0 6,417,907 0 0 6,417,907
Increase in restricted
cash.................. 0 (402,461) 0 0 (402,461)
Decrease in due from
related party......... 0 55,382 0 0 55,382
Decrease (increase) in
prepaid expenses...... 0 29,359 973 0 30,332
Decrease in net
investment in direct
financing leases...... 0 787,375 0 0 787,375
Increase in accrued
rental income......... 0 (1,047,421) 1,044 0 (1,046,377)
Decrease (increase) in
intangibles and other
assets................ 0 (22,612) 0 0 (22,612)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (768,267) 34,441 0 (733,826)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 97,403 (2,864) 0 94,539
Decrease in accrued
interest.............. 0 (362,877) 0 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 0 386,365 (14,175) 0 372,190
Increase (decrease) in
deferred rental
income................ 0 862,647 0 0 862,647
------------ ------------- --------- ---------- -------------
Total adjustments..... 544,049 (34,584,451) 98,337 35,385 (34,450,729)
------------ ------------- --------- ---------- -------------
Net cash provided by
(used in) operating
activities........... (658,194) (23,704,960) 244,246 9,100 (23,451,614)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 0 0 0
Additions to land and
buildings on operating
leases................ (135,820,136) 0 (135,820,136)
Investment in direct
financing leases...... 0 (29,608,346) 0 0 (29,608,346)
Investment in joint
venture............... 0 (117,662) 0 0 (117,662)
Aqcuisition of
businesses............ (9,782,230)(f) (9,782,230) 0 (920,770)(g) (10,861,000)
0 0 (158,000)(g)
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 134,981 0 0 134,981
Investment in mortgage
notes receivable...... 0 (1,388,463) 0 0 (1,388,463)
Collections on mortgage
note receivable....... 0 75,010 0 0 75,010
Investment in notes
receivable............ 0 (1,087,483) 0 0 (1,087,483)
Collection on notes
receivable............ 0 239,596 0 0 239,596
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 0 0 0
------------ ------------- --------- ---------- -------------
Net cash provided by
(used in) investing
activities........... (9,782,230) (177,354,733) 0 (1,078,770) (178,433,503)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 1,519,980 0 0 1,519,980
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,142,237) 0 0 (1,142,237)
Payment of stock
issuance costs........ 0 (722,001) 0 0 (722,001)
Proceeds from borrowing
on line of
credit/notes payable.. 0 109,271,697 0 0 109,271,697
Payment on line of
credit/notes payable.. 0 (22,874,147) 0 0 (22,874,147)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (8,610) 0 0 (8,610)
Distributions to
limited partners...... 0 0 (266,982) 0 (266,982)
Distributions to
stockholders.......... 0 (14,237,405) 0 0 (14,237,405)
Other.................. 0 (209,836) 0 0 (209,836)
------------ ------------- --------- ---------- -------------
Net cash provided by
(used in) financing
activities........... 0 71,597,441 (266,982) 0 71,330,459
Net increase in cash... (10,440,424) (129,462,252) (22,736) (1,069,670) (130,554,658)
Cash at beginning of
year.................. 0 127,401,796 252,521 0 127,654,317
------------ ------------- --------- ---------- -------------
Cash at end of year.... (10,440,424) (2,060,456) 229,785 (1,069,670) (2,900,341)
============ ============= ========= ========== =============
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)...... $ 32,152,408 $ 19,030,497 (a) $ 51,182,905 $10,656,379 $ (468,133) $ 427,134
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation........... 4,042,290 2,889,368 (b) 6,931,658 119,923 79,234 0
Amortization expense... 11,808 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
leases................ 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) (2,187,652) 0 0 0
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 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 693,372 0 0 0
------------- ------------ ------------- ----------- ---------- -------------
Total adjustments..... 6,963,867 2,889,368 9,853,235 (3,608,563) 316,963 1,610,591
------------- ------------ ------------- ----------- ---------- -------------
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
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (58,749,637)(e) (258,851,304) (381,671) (236,372) 0
Investment in direct
financing leases...... (47,115,435) (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) (974,696) 0 0 0
Acquisition of
businesses............
Purchase of other
investments........... (16,083,055) (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) (6,281,069) 0 0 0
Other.................. 0 0 200,000 0 0
------------- ------------ ------------- ----------- ---------- -------------
Net cash provided by
(used in) investing
activities........... (277,338,756) (58,749,637) (336,088,393) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 22,953,518 (e) 30,645,558 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) (34,073) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0
Distributions to
stockholders.......... (39,449,149) (39,449,149) (9,364,488) 0 0
Other.................. (95,101) (95,101) 0 24 (2,500,011)
------------- ------------ ------------- ----------- ---------- -------------
Net cash provided by
(used in) financing
activities........... 313,835,541 22,953,518 336,789,059 (8,200,077) 51,854 (700,074)
Net increase (decrease)
in cash............... 75,613,060 (13,876,254) 61,736,806 449,308 (335,688) 1,845,986
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 $(13,876,254) $ 109,323,583 $ 713,308 962,573 2,526,078
============= ============ ============= =========== ========== =============
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund, Ltd. Adjustments Pro Forma
------------ ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)...... $(16,383,438)(a) $ 45,414,847 $ 1,001,437 $ (96,646)(a) $ 46,319,638
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation........... (340,898)(b) 6,789,917 206,181 130,410 (b) 7,126,508
Amortization expense... 2,176,196 (c) 4,490,280 62,079 4,552,359
Minority interest in
income of consolidated
joint venture......... 30,156 0 30,156
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 18,518 11,126 (d) 14,204
Loss (gain) on sale of
land, building, net
investment in direct
leases................ 0 (235,804) (235,804)
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 1,009,576 0 1,009,576
Gain on
securitization........ (3,356,538) 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 265,871,668 0 265,871,668
Decrease (increase) in
other receivables..... (2,543,413) (6,380) (2,549,793)
Increase in accrued
interest income
included in notes
receivable............ (170,492) 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0
Investment in notes
receivable............ (288,590,674) 0 (288,590,674)
Collections on notes
receivable............ 23,539,641 0 23,539,641
Decrease in restricted
cash.................. 2,504,091 0 2,504,091
Decrease (increase) in
due from related
party................. (953,688) 0 (953,688)
Increase in prepaid
expenses.............. 7,246 (474) 6,772
Decrease in net
investment in direct
financing leases...... 1,971,634 0 1,971,634
Increase in accrued
rental income......... (2,187,652) (3,486) (2,191,138)
Increase in intangibles
and other assets...... (154,351) 0 (154,351)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 846,680 (1,569) 845,111
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. (133,364) (7,081) (140,445)
Increase in accrued
interest.............. (77,968) 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 368 437,211
Decrease in deferred
rental income......... 693,372 0 693,372
------------ ------------- ----------- ----------- -------------
Total adjustments..... 1,835,298 10,007,524 32,352 141,536 10,181,412
------------ ------------- ----------- ----------- -------------
Net cash provided by
(used in) operating
activities........... (14,548,140) 55,422,371 1,033,789 44,890 56,501,050
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 661,300 3,047,241
Additions to land and
buildings on operating
leases................ (259,469,347) 0 (259,469,347)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435)
Investment in joint
venture............... (974,696) 0 (974,696)
Acquisition of
businesses............ (9,782,230)(f) (9,782,230) (920,770)(g) (10,861,000)
(158,000)(g)
Purchase of other
investments........... (16,083,055) 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 295,514 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 212,821 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648)
Collections on mortgage
note receivable....... 291,990 0 291,990
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750)
Collections on
equipment notes
receivable............ 3,046,873 0 3,046,873
Decrease in restricted
cash.................. 0 126,009 126,009
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069)
Other.................. 200,000 0 200,000
------------ ------------- ----------- ----------- -------------
Net cash provided by
(used in) investing
activities........... (9,782,230) (343,997,091) 787,309 (1,078,770) (344,288,552)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 386,592,011 0 386,592,011
Contributions from
limited partners...... 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925)
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 444,399,478 0 444,399,478
Payment on line of
credit/notes payable.. (411,813,826) 0 (411,813,826)
Retirement of shares of
common stock.......... (639,528) 0 (639,528)
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073)
Distributions to
limited partners...... 0 (1,752,707) (1,752,707)
Distributions to
stockholders.......... (48,813,637) 0 (48,813,637)
Other.................. (2,595,088) 0 (2,595,088)
------------ ------------- ----------- ----------- -------------
Net cash provided by
(used in) financing
activities........... 0 327,940,762 (1,752,707) 0 326,188,055
Net increase (decrease)
in cash............... (24,330,370) 39,366,042 68,391 (1,033,880) 38,400,553
Cash at beginning of
year.................. 49,829,130 184,130 50,013,260
------------ ------------- ----------- ----------- -------------
Cash at end of year.... $(24,330,370) $ 89,195,172 $ 252,521 $(1,033,880) $ 88,413,813
============ ============= =========== =========== =============
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of 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 Income Fund. This unaudited pro forma financial
information has been prepared utilizing the historical financial statements of
APF and the historical combined financial information of the Advisor, CNL
Restaurant Financial Services Group and the Income Fund and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, the Advisor the CNL Restaurant Financial Services Group and the Income
Fund. The Pro Forma Balance Sheet was prepared as if the transactions described
above occurred on 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 Fund 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 Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
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
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
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.
(B) Represents the effect of recording the acquisitions of the Advisor,
the CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Shares Offered.......... 3,800,000 2,350,000 570,979.55 6,720,979.55
Exchange Value.......... $ 20 $ 20 $ 20 $ 20
----------- ----------- ----------- ------------
Share Consideration..... $76,000,000 $47,000,000 $11,419,591 $134,419,591
Cash Consideration...... -- -- 158,000 158,000
APF Transaction Costs... 6,044,305 3,737,925 920,770 10,703,000
----------- ----------- ----------- ------------
Total Purchase
Price.............. $82,044,305 $50,737,925 $12,498,361 $145,280,591
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 7,141,252 $10,006,878 $ 8,205,946 $ 25,354,076
Purchase Price
Adjustments:
Land and buildings on
operating leases..... 3,038,912 3,038,912
Net investment in
direct financing
leases............... 775,372 775,372
Investment in joint
ventures............. 537,368 537,368
Accrued rental
income............... (29,747) (29,747)
Intangibles and other
assets............... (2,792,876) (29,490) (2,822,366)
Goodwill*............. 43,523,923 -- 43,523,923
Excess purchase
price................ 74,903,053 -- -- 74,903,053
----------- ----------- ----------- ------------
Total Allocation.... $82,044,305 $50,737,925 $12,498,361 $145,280,591
=========== =========== =========== ============
</TABLE>
- --------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $10,703,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $74,903,053 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 43,523,923 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...... 74,903,053
Goodwill for
CFC
(Intangibles
and other
assets)....... 43,523,923
CFC/CFS Org
Costs/Other
Assets...... 2,792,876
Cash to pay
APF
transaction
costs....... 9,782,230
APF Common
Stock....... 61,500
APF APIC..... 122,938,500
(To record
acquisition of
CFA, CFS and
CFC)
2.Partners
Capital......... 8,205,946
Land and
buildings on
operating
leases........ 3,038,912
Net investment
in direct
financing
leases........ 775,372
Investment in
joint
ventures...... 537,368
Accrued
rental
income...... 29,747
Intangibles
and other
assets...... 29,490
Cash to pay
APF
Transaction
costs....... 920,770
Cash
consideration
to Income
Funds....... 158,000
APF Common
Stock....... 5,710
APF APIC..... 11,413,881
(To record
acquisition of
Income Fund)
</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 Income Fund of $126,196 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, 1999.
(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.
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund:
<TABLE>
<S> <C>
Origination fees from affiliates............................. $ (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)
===========
(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).
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)
</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>
(g) Represents the elimination of $292,786 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to in
footnote (4)
<TABLE>
<S> <C>
Amortization of goodwill......................................... $544,049
</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 $5,535 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms for
the leases acquired from the Income Fund as if the leases had been acquired
on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees.................................................. $ 0
Reimbursement of administrative costs............................ (8,948)
-------
$(8,948)
=======
</TABLE>
(l) Represents the elimination of $8,948 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $5,926 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $2,361 resulting from
assuming that acquisitions of properties that had been operational when APF
acquired them from January 1, 1999 through May 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 Fund 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 $32,603 as a
result of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the Acquisition
of the Income Fund under the purchase accounting method. The adjustment to
the basis of the buildings is being depreciated using the straight-line
method over the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense of $2,782
as a result of adjusting the historical basis of the real estate owned by
the Income Fund, indirectly through joint venture or tenancy in common
arrangements, to fair value as a result of accounting for the Acquisition
of the Income Fund under the purchase accounting method. The adjustment to
the basis of the buildings owned indirectly by the Income Fund is being
depreciated using the straight-line method over the remaining useful lives
of the properties.
(r) Common shares issued during the period required to fund acquisitions
as if they had been acquired on January 1, 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.
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(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.
(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
Advisor, the CNL Restaurant Financial Services Group and the Income Fund:
<TABLE>
<S> <C>
Origination fees from affiliates............................ $ (1,773,406)
Secured equipment lease fees................................ (54,998)
Advisory fees............................................... (305,030)
Reimbursement of administrative costs....................... (408,762)
Acquisition fees............................................ (21,794,386)
Underwriting fees........................................... (388,491)
Administrative, executive and guarantee fees................ (1,233,043)
Servicing fees.............................................. (1,570,331)
Development fees............................................ (229,153)
Management fees............................................. (1,851,004)
------------
Total..................................................... $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL Financial
Corp. On a historical basis, CNL Financial Services, Inc. records all of
the loan origination fees received as revenue. For purposes of presenting
pro forma financial statements of these entities on a combined basis, these
loan origination fees are required to be deferred and amortized into
revenues over the term of the loans originated in accordance with generally
accepted accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the year ended December
31, 1998, which were deferred for pro forma purposes as described in
5(II)(c). These deferred loan origination fees are being amortized and
recorded as interest income over the terms of the underlying loans (15
years).
<TABLE>
<S> <C>
Interest income................................................... $207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs associated
with the acquisition, development and leasing of properties acquired during
the period as if costs relating to properties developed by APF were subject
to capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs............................. $(4,241,719)
</TABLE>
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees.............................................. $(1,851,004)
Administrative executive and guarantee fees.................. (1,233,043)
Servicing fees............................................... (1,269,357)
Advisory fees................................................ (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(g) Represents the elimination of $2,161,897 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to in
footnote (4)
<TABLE>
<S> <C>
Amortization of goodwill....................................... $2,176,196
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure that
exists within APF. APF expects to continue to qualify as a REIT and does
not expect to incur federal income taxes.
(j) Represents $22,141 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms for
the leases acquired from the Income Fund as if the leases had been acquired
on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees................................................. $ 0
Reimbursement of administrative costs........................... (19,424)
--------
$(19,424)
========
</TABLE>
(l) Represents the elimination of $19,424 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $26,308 in historical professional services
and administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $3,559 resulting from
assuming that acquisitions of properties that had been operational when APF
acquired them from January 1, 1998 through 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 Fund had
been issued as of January 1, 1998 and that these entities had operated
under a REIT structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $130,410 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Fund through joint venture or tenancy in common
arrangements with affiliates or unrelated third parties, to fair value as a
result by the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method. The
adjustment to the basis of the buildings is being depreciated using the
straight-line method over the remaining useful lives of the properties.
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense of
$11,126 as a result of adjusting the historical basis of the real estate
owned by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method. The
adjustment to the basis of the buildings owned indirectly by the Income
Fund is being depreciated using the straight-line method over the remaining
useful lives of the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF and the
Advisor which on a historical basis were capitalized as part of the basis
of the building.
(s) Common shares issued during the period required to fund acquisitions
as if they had been acquired on January 1, 1998 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the pro forma
financial statements, it is assumed that the stockholders approved a
reverse stock split proposal and a proposal to increase the number of
authorized common shares of APF on January 1, 1998.
(t) 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 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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non-Cash Investing Activites
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B)
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the use of amounts borrowed under APF's credit facility
and the use of cash to 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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
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Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
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(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
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Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
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Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among by and among CNL American Properties Fund,
Inc., a Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware
limited partnership (the "Operating Partnership"), CNL APF GP corp., a
Delaware corporation (the "OP General Partner"), CNL Income Fund, Ltd., a
Florida limited partnership (the "Fund"), and Robert A. Bourne, James M.
Seneff, Jr., and CNL Realty Corporation, a Florida corporation (together with
Messrs. Borne and Seneff, the "General Partners"). APF, the Operating
Partnership, the OP General Partner, the Fund and the General Partners are
referred to collectively herein as the "Parties" and individually as a
"Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund
will be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. Amendments to Merger Agreement
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its
entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred
by the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote
against the Merger and affirmatively elect the note option, such limited
partners shall be entitled to receive, in lieu of the Share
Consideration, notes (the "Notes") in the aggregate amount equal to 97%
of the value (based on the Exchange Value as defined in the Registration
Statement) of the Share Consideration such Dissenting Partners would
have otherwise received had such partners not elected to receive the
Notes (the "Note Option"). The Notes will mature on the fifth
anniversary of the Closing Date and will bear interest at a fixed rate
equal to seven percent. The aggregate Share Consideration shall be
reduced on a one-for-basis for all APF Shares otherwise distributable to
Dissenting Partners had such Dissenting Partners not elected the Note
Option."
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
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1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to
Dissenting Limited Partners shall not have exceeded 15% of the value of
the Share Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. General
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will
constitute one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of
Florida or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Florida.
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IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.________
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne____________
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne____________
By: Robert A. Bourne
Its: President
CNL INCOME FUND, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.________
By: James M. Seneff, Jr.
Its: Chief Executive Officer
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
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"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 1,157,759 fully paid and nonassessable APF Common
Shares (578,880 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $10,544,837, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OP
General Partner and The Operating Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 59,842,241 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to execute and
deliver this Agreement and to perform their obligations hereunder. The
execution, delivery and
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performance by APF, the OP General Partner and the Operating Partnership of
this Agreement have been duly and validly authorized by the boards of directors
of APF and the OP General Partner. This Agreement constitutes the valid and
legally binding obligation of APF, the OP General Partner and the Operating
Partnership, enforceable in accordance with its terms and conditions. None of
APF, the OP General Partner or the Operating Partnership needs to give any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order to consummate the
transactions contemplated by this Agreement, except in connection with federal
securities laws and any applicable "Blue Sky" or state securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions the validity of this
Agreement or any action to be taken by APF in connection with the consummation
of the
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transactions contemplated hereby or could otherwise prevent or delay the
consummation of the transactions contemplated by this Agreement. Except as
publicly disclosed by APF in any APF SEC Document, none of APF or its
Subsidiaries is subject to any outstanding order, writ, injunction or decree
which, insofar as can be reasonably foreseen in the future, could reasonably be
expected to have a Material Adverse Effect on APF or would prevent or delay the
consummation of the transactions contemplated hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material
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terms of its permits, except where the failure so to comply could not
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF, the businesses of APF and its Subsidiaries are not,
to APF's Knowledge, being conducted in violation of any law, ordinance or
regulation of any governmental entity except that no representation or warranty
is made in this Section 6.14 with respect to environmental laws and except for
violations or possible violations which do not, and, insofar as reasonably can
be foreseen, in the future will not, have a Material Adverse Effect on APF.
Except as publicly disclosed by APF in its APF SEC Documents, no investigation
or review by any governmental entity with respect to APF or its Subsidiaries is
pending or, to the Knowledge of APF, threatened, nor, to the Knowledge of APF,
has any government entity indicated an intention to conduct the same, other
than, in each case, those which APF reasonably believes will not have a
Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 30,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such leases and subleases (as amended to date). With respect to
each lease and sublease listed in Section 7.12(b) of the Disclosure Schedule:
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(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General Partners have
made available to APF and the Operating Partnership correct and complete copies
of all such licenses, sublicenses, agreements, and permissions (as amended to
date).
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<PAGE>
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is
in good operating condition and repair (subject to normal wear and tear), and
is suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a
party:
(a) any agreement (or group of related agreements) for the lease of
personal property to or from any Person providing for lease payments in excess
of $25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates
(other than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any
of the General Partners or the corporate General Partner's directors,
officers, and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and
effect on identical terms following the consummation of the transactions
contemplated hereby (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (C) no party is in breach or
default, and no event has occurred which with notice or lapse of time would
constitute a breach or default, or permit termination, modification, or
acceleration, under the agreement; and (D) no party has repudiated any
provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of
the Fund are reflected properly on its books and records, are valid
receivables subject to no setoffs or counterclaims, and are current and
collectible in accordance with their terms at their recorded amounts, subject
only to the reserve for bad debts set forth on the face of the Most Recent
Balance Sheet (rather than in any notes thereto) as adjusted for the passage
of time through the Closing Date in accordance with the past custom and
practice of the Fund.
7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
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7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including policies
providing property, casualty, liability, and workers' compensation coverage and
bond and surety arrangements) to which the Fund has been a party, a named
insured, or otherwise the beneficiary of coverage at any time within the past
five years (or such lesser periods as the Fund has actively engaged in business
or owned any material assets): (i) the name, address, and telephone number of
the agent; (ii) the name of the insurer, the name of the policyholder, and the
name of each covered insured; and (iii) the policy number and the period of
coverage. With respect to each current insurance policy, to the Knowledge of
the General Partners and the Fund: (A) the policy is legal, valid, binding,
enforceable, and in full force and effect; (B) the policy will continue to be
legal, valid, binding, enforceable, and in full force and effect on identical
terms following the consummation of the transactions contemplated hereby; (C)
neither the Fund nor any other party to the policy is in breach or default
(including with respect to the payment of premiums or the giving of notices),
and no event has occurred which, with notice or the lapse of time, would
constitute such a breach or default, or permit termination, modification, or
acceleration, under the policy; and (D) no party to the policy has repudiated
any provision thereof. The Fund has been covered during the past five years (or
such lesser periods as the Fund has actively engaged in business or owned any
material assets) by insurance in scope and amount customary and reasonable for
the businesses in which it has engaged during the aforementioned period.
Section 7.18 of the Disclosure Schedule describes any self-insurance
arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the transactions
contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had any
liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do not
materially violate any such laws, ordinances, regulations or orders. The Fund
is not subject to any Liability or claim in connection with any environmental
law or any use, treatment, storage or disposal of any hazardous substance or
material or pollutant or any spill, leakage, discharge or release of any
hazardous substance or material or pollutant as a result of having owned or
operated any business prior to the Effective Time, which if a violation existed
would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $1,157,759 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $115,776 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
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
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CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND II, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund II, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly-owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999, and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships,which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her, or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties consists of a
static portfolio of properties leased on a triple-net basis, APF has the
ability to offer a complete range of restaurant property services to operators
of national and regional restaurant chains, from triple-net leasing and
mortgage financing to site selection, construction management and build-to-suit
development. If APF acquires all of the Income Funds in the Acquisition, APF
expects to have total assets of approximately $1.5 billion at the time of the
consummation of the Acquisition and will be one of the largest triple-net lease
REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 1,196,634 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is uncertain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for
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trading on the NYSE. We do not know the value at which an APF Share will trade
on the NYSE upon listing. It is possible that the APF Shares will trade at
prices substantially below the exchange value. APF has, however, recently sold
$750 million of APF Shares through three public offerings. In each offering,
the offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At March 31, 1999, APF has invested all of the net offering proceeds to acquire
restaurant properties, to make mortgage loans and to pay fees and other
expenses.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the Acquisition?
There are a number of material risks and considerations that you should
consider, including:
. We are uncertain as to the value at which APF Shares will trade following
listing.
. We have material conflicts in light of our being both general partners of
the Income Funds and members of APF's Board of Directors.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. As stated below, the Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote against the
Acquisition.
Did you receive a fairness opinion in connection with APF's acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
with respect to the fairness, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the colored
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's acquisition of your
Income Fund. If you prefer, you may instead vote by telephone, following the
instructions on your consent form. If you sign and send in your consent form
and do not indicate how you want to vote, your consent form will be counted as
a vote "For" the Acquisition. If you do not vote or you abstain from voting, it
will count as a vote "Against" the Acquisition.
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In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2004 in an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only receive the notes option if you vote
"Against" the Acquisition, and you elect to receive the notes on your consent
form. You will receive APF Shares if your Income Fund elects to be acquired in
the Acquisition and you vote "For" the Acquisition, or you vote "Against" the
Acquisition and do not affirmatively select the notes option on your consent
form. In addition, if Limited Partners in your Income Fund elect to receive
notes in an amount greater than 15% of the estimated value of APF Shares, based
on the exchange value, to be paid to your Income Fund, then APF has the right
to decline to acquire your Income Fund. The notes will not be listed on any
exchange or automated quotation system, and a market for the notes will not
likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
the tax that you must pay will generally be based on the difference between the
value of the APF Shares you receive and the tax basis of your units. If you
elect to receive notes, your tax will be based upon your allocable share of the
gain which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Some of
the gain may be subject to the 25% rate of tax applicable to certain types of
real property gain.
We urge you to consult with your tax advisor to evaluate the taxes that will be
incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $1,374. To
review the tax consequences to the Limited Partners of the Income Funds in
greater detail, see pages 180 through 194 of the consent solicitation and
"Federal Income Tax Considerations" in this supplement.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds acquired by
APF may be differently constructed, located in a different geographic area or
of a different restaurant chain than the restaurant properties owned by your
Income Fund. Because the market for real estate may vary from one region of the
country to another, the change in geographic diversity may expose you to
different and greater risks than those to which you are presently exposed. For
geographic information regarding APF's and the Income Funds' restaurant
properties, see "APF's Business and The Restaurant Properties--Business
Objectives and Strategies" and "--The Restaurant Properties--General" and
"Business of the Income Funds--Description of Restaurant Properties" in the
consent solicitation.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund. This description is qualified in its entirety
by the more detailed discussion in the section entitled "Risk Factors"
contained in the consent solicitation.
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Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease below the exchange value upon listing.
Your Income Fund will be receiving 1,196,634 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices substantially below
the exchange value or the historical per share book value of the assets of APF.
The APF Shares have been approved for listing on the NYSE, subject to official
notice of issuance. Prior to listing, the existing APF stockholders have not
had an active trading market in which they could sell their APF Shares.
Additionally, any Limited Partners of the Income Funds who become APF
stockholders as a result of the Acquisition, will have transformed their
investment in non-tradable units into an investment in freely tradable APF
Shares. Consequently, some of these stockholders may choose to sell their APF
Shares upon listing at a time when demand for APF Shares may be relatively low.
The market price of the APF Shares may be volatile after the Acquisition, and
the APF Shares could trade at prices substantially less than the exchange value
as a result of increased selling activity following the issuance of the APF
Shares, the interest level of investors in purchasing the APF Shares after the
Acquisition and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund made $950, $950 and $1,318, respectively, in distributions per $10,000
investment to you. The amount distributed to you in 1998 included a special
distribution of net sales proceeds of $493 per $10,000 investment. While
historically, APF has made distributions equal to 7.625% per APF Share, based
on the exchange value, we cannot be sure that APF will be able to maintain this
level of distributions in the future. In the event that APF is unable to
maintain this level of distributions, your distributions per $10,000 investment
may decrease substantially after the Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have two material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne, have a different interest in the completion of the Acquisition
which may conflict with your interest as a Limited Partner of the Income Fund
or with their own positions as the general partners of your Income Fund.
Second, while we will not receive any APF Shares as a result of APF's
Acquisition of your Income Fund, we, as the general partners of your Income
Fund, may be required to pay all or a substantial portion of the Acquisition
costs allocated to your Income Fund to the extent that you or other Limited
Partners of your Income Fund vote against the Acquisition. For additional
information regarding the Acquisition costs allocated to your Income Fund, see
"Comparison of Alternative Effect on Financial Condition and Results of
Operations" contained in this supplement.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own and lease on a triple-net basis, on the date
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that the Acquisition is consummated, assuming only your Income Fund was
acquired as of March 31, 1999, 550 restaurant properties. The risks inherent in
investing in an operating company such as APF include that APF may invest in
new restaurant properties that are not as profitable as APF anticipated, may
incur substantial indebtedness to make future acquisitions of restaurant
properties which it may be unable to repay and may make mortgage loans to
prospective operators of national and regional restaurant chains which may not
have the ability to repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through sale of your APF Shares, not from
liquidation proceeds from restaurant properties. Continuation of your Income
Fund would, on the other hand, permit you eventually to receive liquidation
proceeds, if any, from the sale of the Income Fund's restaurant properties, and
your share of these sale proceeds could be higher than the amount realized from
the sale of your APF Shares or from the combination of cash paid to and
payments on any notes if you elect to receive the notes.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default 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. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
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APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
March 31, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.62x and its ratio of debt-to-total no assets was
28.03%. If only your Income Fund were acquired as of that date, APF's debt
service ratio would have been 3.75x and its ratio of debt-to-total assets would
have been 27.40%. Up through the time immediately prior to the consummation of
the Acquisition, as a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former limited partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgages. APF
typically does not require that a third party guarantee the obligations of the
tenant or the borrower. The ability of the tenants or borrowers to pay their
obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain may adversely affect the
economic viability of the restaurant chain, including but not limited to: (1)
national, regional and local
S-6
<PAGE>
economic conditions which may be adversely affected by industry slowdowns,
employer relocations, prevailing employment conditions and other factors and
which may reduce consumer demand for the products offered by APF's customers;
(2) local real estate conditions; (3) changes or weaknesses in specific
industry segments; (4) perceptions by prospective customers of the safety,
convenience, services and attractiveness of the restaurant chain; (5) changes
in demographics, consumer tastes and traffic patterns; (6) the ability to
obtain and retain capable management; (7) changes in laws, building codes,
similar ordinances and other legal requirements, including laws increasing the
potential liability for environmental conditions existing on properties; (8)
the inability of a particular restaurant chain's computer system, or that of
its franchisor or vendors, to adequately address Year 2000 issues; (9)
increases in operating expenses; and (10) increases in minimum wages, taxes,
including income, service, real estate and other taxes, or mandatory employee
benefits.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as a stockholder, would be reduced substantially for
each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to certain adjustments that are unique to REITs, a REIT generally
must distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
For a more detailed discussion of the risks associated with the Acquisition,
see "Risk Factors" in the consent solicitation.
CONSIDERATION PAID TO INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
S-7
<PAGE>
The following table sets forth information regarding the estimated value of
the consideration that your Income Fund will receive in the Acquisition. The
APF Shares payable to your Income Fund will not change if APF acquires fewer
than all of the Income Funds in the Acquisition. This data assumes that none of
the Limited Partners of your Income Fund have elected to receive notes. You
should note that the APF Shares may trade at prices substantially below the
exchange value upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited
Partner
Original Investments
Limited Less any
Partner Distributions Estimated Value
Investments of Net Sales Number of Estimated of APF Shares
Less any Proceeds per APF Value of APF Estimated Value per Average
Distributions $10,000 Shares Shares Estimated of APF Shares $10,000 Original
of Net Sales Original Offered to Payable to Acquisition after Acquisition Limited Partner
Proceeds(1) Investment(1) Income Fund Income Fund Expenses Expenses Investment
- ------------- ------------- ----------- ------------ ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$23,046,408 $9,219 1,196,634 $23,932,680 295,000 $23,637,680 $9,455
</TABLE>
- --------
(1) The original Limited Partner investment in the Income Fund was $25,000,000.
These columns reflect, as of March 31, 1999, an adjustment to the Limited
Partners' original investments based on distributions of net sales proceeds
received from sales of restaurant properties (both as a special
distribution and those that were added to working capital and subsequently
distributed).
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2004. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2004. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest. For more detailed information, see "The Acquisition" and
"Description of the Notes" in the consent solicitation.
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(/1/)..................................................... $13,498
Appraisals and Valuation(/2/)....................................... 6,270
Fairness Opinions(/3/).............................................. 30,000
Solicitation Fees(/4/).............................................. 12,084
Printing and Mailing Fees(/5/)...................................... 79,249
Accounting and Other Fees(/6/)...................................... 27,607
-------
Subtotal.......................................................... 168,708
=======
</TABLE>
S-8
<PAGE>
Closing Transaction Costs
<TABLE>
<S> <C>
Title, Transfer Tax and Recording Fees(/7/)........................ 57,881
Legal Closing Fees(/8/)............................................ 28,590
Partnership Liquidation Costs(/9/)................................. 39,821
--------
Subtotal......................................................... 126,292
--------
Total.............................................................. $295,000
========
</TABLE>
- --------
(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $312,063. Your Income
Fund's pro-rata portion of these fees was determined based on the
percentage of the value of the APF Share consideration payable to your
Income Fund, based on the exchange value, to the total value of the APF
Share consideration payable to all of the Income Funds, based on the
exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the Income
Funds in connection with the Acquisition were $105,420. Your Income Fund's
pro-rata portion of these fees was determined based on number of restaurant
properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and incurred a
fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $249,626. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $1,610,399. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
(6) Aggregate accounting and other fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $683,904. Your Income
Fund's pro-rata portion of these fees was determined based on the
percentage of your Income Fund's total assets as of March 31, 1999 to the
total assets of all of the Income Funds as of March 31, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by all of
the Income Funds in connection with the Acquisition is estimated to be
$1,312,808. Your Income Fund's pro-rata portion of these fees was
determined based on the percentage of the value of the APF Share
consideration payable to your Income Fund, based on the exchange value, to
the total value of the APF Share consideration payable to all of the Income
Funds, based on the exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,454. Your Income
Fund's pro-rata portion of these fees was determined based on the
percentage of your Income Fund's total assets as of March 31, 1999 to the
total assets of all of the Income Funds as of March 31, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of the Income
Funds in connection with the Acquisition is estimated to be $895,326. Your
Income Fund's pro-rata portion of these costs was determined based on the
percentage of the value of the APF Share consideration payable to your
Income Fund, based on the exchange value, to the total value of the APF
Share consideration payable to all of the Income Funds, based on the
exchange value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
S-9
<PAGE>
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 66 2/3% or more in value of your Income Fund's
restaurant properties. Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding units.
Consequence of Failure to Approve the Acquisition
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition, the Acquisition may
not be consummated under the terms of the partnership agreement. In such event,
we plan to continue to operate your Income Fund as a going concern and to
eventually dispose of your Income Fund's restaurant properties approximately 7
to 15 years after they were acquired or as soon thereafter if, in our opinion,
market conditions permit, as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at . We and members of APF's
management intend to solicit actively your support for the Acquisition and
would like to use the special meeting to answer questions about the Acquisition
and the solicitation materials and to explain in person our reasons for
recommending that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain their votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding Units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning on attending the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about ,
1999 and will continue until the later of (a) , 1999, a date not less than
60 calendar days from the initial delivery of the solicitation materials, or
(b) such later date as we may select and as to which we give you notice. At our
discretion, we may elect to extend the solicitation period. Under no
circumstances will the solicitation period be extended beyond March 31, 2000.
Any consent form received by Corporate Election Services prior to 5:00 p.m.,
Eastern time, on the last day of the solicitation period will be
S-10
<PAGE>
effective provided that such consent form has been properly completed and
signed. If you fail to return a signed consent form by the end of the
solicitation period, your units will be counted as voting "Against" the
Acquisition of your Income Fund and you will receive APF Shares if your Income
Fund is acquired. If you prefer, you may instead vote by telephone according to
the instructions on your consent form.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the quarter
ended March 31, 1999, the aggregate amounts accrued or paid by your Income Fund
to us are shown below under "Historical Distributions Paid to the General
Partners and Affiliates" and the estimated amounts of compensation that would
have been paid had the Acquisition been in effect for the periods presented,
are shown below under "Pro Forma Distributions to Be Paid to the General
Partners Following the Acquisition":
S-11
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, Quarter
------------------------ Ended
1996 1997 1998 March 31, 1999
------- ------- -------- --------------
<S> <C> <C> <C> <C>
Historical Distributions Paid to
the General Partners and
Affiliates:
General Partner Distributions...... -- -- -- --
Accounting and Administrative
Services.......................... $79,624 $78,139 $ 86,009 $24,699
Broker/Dealer Commissions.......... -- -- -- --
Due Diligence and Marketing Support
Fees.............................. -- -- -- --
Acquisition Fees................... -- -- -- --
Asset Management Fees.............. -- -- -- --
Real Estate Disposition Fees(1).... -- -- 45,150 --
------- ------- -------- -------
Total historical................. $79,624 $78,139 $131,159 $24,699
Pro Forma Distributions to Be Paid
to the General Partners Following
the Acquisition:
Cash Distributions on APF Shares... -- -- -- --
Salary Compensation................ -- -- -- --
------- ------- -------- -------
Total pro forma.................. -- -- -- --
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to certain minimum
returns to the Limited Partners. To date, no such fees have been paid since
the required minimum returns have not been made to the Limited Partners.
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
contained herein under the caption "Financial Statements" and in the consent
solicitation under the caption "Summary--Our Reasons for Supporting the
Acquisition--Prices for Income Fund Units."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
Quarter Ended
March 31, 1999
--------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income..... $763 $728 $739 $950 $ 686 $206 $121
Distributions from Sales of
Properties................... -- -- -- -- 493 -- --
Distributions from Return of
Capital(1)................... 187 222 211 -- 139 -- 84
---- ---- ---- ---- ------ ---- ----
Total....................... $950 $950 $950 $950 $1,318 $206 $205
==== ==== ==== ==== ====== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from certain non-cash
items. This amount is not required to be presented as a return of capital
except for purposes of this table, and the Income Fund has not treated this
amount as a return of capital for any other purpose.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses during 1999. Thus, the pro forma information regarding
the distributions to APF stockholders for the quarter ended March 31, 1999 is
not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
S-12
<PAGE>
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the Acquisition
with those of several alternatives, the Acquisition is more economically
attractive to you and the other Limited Partners than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to certain closing conditions. Second, if your Income Fund is acquired
all Limited Partners of your Income Fund who vote against the Acquisition will
be given the option of receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others, that we will be relieved
from certain ongoing liabilities with respect to the Income Fund if it is
acquired by APF. For a further discussion of the conflicts of interest and
potential benefits of the Acquisition to us, see "Conflicts of Interest" below.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the values of the
consideration which would have been received by you and the other Limited
Partners in alternative transactions and concluded that the Acquisition is fair
based on such comparison. In addition, we believe the Acquisition is the best
way to maximize the return on your
S-13
<PAGE>
investment because of your ability to participate in the potential appreciation
of APF Shares. Since the investment in your Income Fund is an investment in a
static portfolio due to the restrictions contained in your Income Fund's
partnership agreement and limited capital resources, your investments have less
of an opportunity to appreciate. Because APF is a growth-oriented operating
company, you will have the opportunity, as an APF stockholder, to participate
in APF's future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinions of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinions of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., an affiliate of CNL Group, Inc., and (3) Valuation
Associates has previously performed valuation appraisals for APF. See "Reports,
Opinions and Appraisals--Fairness Opinions" in the consent solicitation.
On rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to, any other
aspect of the Acquisition, including:
.the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition or
the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Legg Mason's opinion also does not compare the relative merits of the
Acquisition with those of any other transaction or business strategy which were
or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares will exceed the going concern value and
liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to
S-14
<PAGE>
you and the other Limited Partners. The effect of the Acquisition and the cash
available for distribution will vary, however, from Income Fund to Income Fund.
In addition to the receipt of cash available for distribution, you and the
other Limited Partners will be able to benefit from the potential growth of APF
as an operating company and will also receive investment liquidity through the
public market in APF Shares.
5. Net Book Value of the Income Fund. We calculated the book value of your
Income Fund under generally accepted accounting principles, or GAAP, as of
March 31, 1999 per average $10,000 original investment. Since the calculation
of the book value was done on a GAAP basis, it is primarily based on historical
cost and, therefore, it is not indicative of the true fair market value of your
Income Fund. This figure was compared to three other figures:
(1) the value of the Income Fund if it commenced an orderly liquidation of
its investment portfolio on December 31, 1998,
(2) the value of the Income Fund if it continued to operate in accordance
with its existing partnership agreement and business plans, and
(3) the estimated value of the APF Shares, based on the exchange value, paid
to each Income Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated Value
Original of APF Shares
Limited Partner per Average
Investments Less Going $10,000 Original
any Distributions GAAP Book Liquidation Concern Limited Partner
of Sales Proceeds(1) Value Value(2) Value(2) Investment
-------------------- --------- ----------- -------- ----------------
<S> <C> <C> <C> <C> <C>
CNL Income Fund II,
Ltd.................... $9,219 $7,076 $8,724 $9,419 $9,455
</TABLE>
- --------
(1) This column reflects, as of December 31, 1998, an adjustment to the Limited
Partners' original average $10,000 investment based on distributions of net
sales proceeds received from sales of restaurant properties (both as a
special distribution and those that were added to working capital and
subsequently distributed).
(2) Liquidation and going concern values were based on appraisals prepared by
Valuation Associates. For a complete description of the methodologies
employed by Valuation Associates, see "Reports, Opinions and Appraisals" in
the consent solicitation.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have contractual
obligations pursuant to your Income Fund's partnership agreement as well as
state law to assess whether the terms of the Acquisition are fair and equitable
to the Limited Partners of your Income Fund without regard to whether the
Acquisition is fair and equitable to any of the other participants, including
the Limited Partners in other Income Funds. James M. Seneff, Jr. and Robert A.
Bourne act as the individual general partners of all of the Income Funds and
also as members of the Board of Directors of APF. While Messrs. Seneff and
Bourne have sought faithfully to discharge their obligations to your Income
Fund, there is an inherent conflict of interest in serving, directly or
indirectly, in a similar capacity with respect to your Income Fund and also on
APF's Board of Directors.
Lack of Independent Representation
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and
S-15
<PAGE>
conditions, including the consideration to be received, of the Acquisition. If
an independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We have
been the parties responsible for structuring all the terms and conditions of
the Acquisition. Legal counsel engaged to assist with the preparation of the
documentation for the Acquisition, including this consent solicitation, was
engaged by us and did not serve, or purport to serve, as legal counsel for the
Income Funds or Limited Partners. If an independent representative had been
retained for the Income Funds, the terms of the Acquisition may have been
different and possibly more favorable to the Limited Partners. In particular,
had separate representation for each of the Income Funds been arranged by us,
issues unique to the value of each of the specific Income Funds might have been
highlighted or received greater attention, resulting in adjustments to the
value assigned to the assets of such Income Funds and increasing the number of
APF Shares or notes that would be allocable to such Income Fund if acquired in
the Acquisition.
Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive two material benefits. These benefits include:
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr. Seneff
serving as Chairman of APF and Mr. Bourne serving as Vice Chairman.
Furthermore, they will be entitled to receive performance-based
incentives, including stock options, under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of the Income Funds. we are legally liable for all of
the Income Funds liabilities to the extent that the Income Funds are
unable to satisfy such liabilities. Because the partnership agreement for
each Income Fund prohibits the Income Funds from incurring indebtedness,
the only liabilities the Income Funds have are liabilities with respect
to their ongoing business operations. In the event that one or more
Income Funds are acquired by APF, we would be relieved of our legal
obligation to satisfy the liabilities of the acquired Income Fund or
Income Funds.
S-16
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Certain Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund. If
your Income Fund is acquired by APF, and you have voted "For" the Acquisition,
you will receive APF Shares. If you have voted "Against" the Acquisition but
your Income Fund is acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under certain circumstances, even
if APF were to make the same level of distributions as your Income Fund, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you. For certain other differences attributable to APF's status as a REIT,
see "-- Taxation of APF" and "-- Taxation of Stockholders -- Taxable Domestic
Stockholders" in the consent solicitation.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF, the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain and loss based on the
exchange value, for an average $10,000 original Limited Partner investment in
your Income Fund, is set forth in the table below for those Limited Partners
subject to federal income taxation.
S-17
<PAGE>
<TABLE>
<CAPTION>
Estimated
Gain/(Loss)
per Average
$10,000 Original
Limited Partner
Investment(1)
----------------
<S> <C>
CNL Income Fund II, Ltd........................................ $1,374
</TABLE>
- --------
(1) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be significantly below the exchange value.
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one more individuals or entities in exchange for the stock of that corporation,
and (2) immediately after the exchange, such individuals or entities are in
control of the corporation. For purposes of section 351(a), control is defined
as the ownership of stock possessing at least 80 percent of the total combined
voting power of all classes of stock entitled to vote and at least 80 percent
of the total number of shares of all other classes of stock of the corporation.
APF has represented to Shaw Pittman, APF's tax counsel, that, following the
Acquisition, the Limited Partners of the Income Funds will not own stock
possessing at least 80 percent of the total combined voting power of all
classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if
any, assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2004, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares and/or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses
S-18
<PAGE>
from the sale of section 1231 assets of your Income Fund would be combined with
any other section 1231 gains and losses that you recognize in that year. If the
result is a net loss, such loss is characterized as an ordinary loss. If the
result is a net gain, it is characterized as a capital gain, except that the
gain will be treated as ordinary income to the extent that you have "non-
recaptured section 1231 losses." For these purposes, the term "non-recaptured
section 1231 losses" means your aggregate section 1231 losses for the five most
recent prior years that have not been previously recaptured. However, gain
recognized on the sale of personal property will be taxed as ordinary income to
the extent of all prior depreciation deductions taken by your Income Fund prior
to sale. In general, you may only use up to $3,000 of capital losses in excess
of capital gains to offset ordinary income in any taxable year. Any excess loss
is carried forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the notes may recognize gain in the year of the
Acquisition despite the fact that they will not receive cash with which to pay
the tax on the gain. Such Limited Partners will adjust the basis of the notes
as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes. See "--Tax Consequences of Liquidation and
Termination of Your Income Fund" below.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition, including gain or loss resulting from the Acquisition
described above. If your taxable year is not the calendar year, you could be
required to recognize as income in a single taxable year your share of your
Income Fund's income attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units, and your holding period
for the notes for purposes of determining capital gain or loss from the
disposition of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17) or
(20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
S-19
<PAGE>
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
For a discussion of the taxation of APF, see "Federal Income Tax
Considerations--Taxation of APF" in the consent solicitation.
S-20
<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 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 2,307,364 1,391,466 8,137 (2,450,663)(b),(c)
Interest and
Other Income..... 2,214,763 0 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 0 1,095,269 2,563,714 1,323,577 64,186 (377,734)(e)
Management and
Advisory Fees.... 697,364 0 697,364 0 0 611,196 (1,308,560)(f)
Fees to Related
Parties.......... 0 0 0 23,326 292,575 0 (292,786)(g)
Interest
Expense.......... 0 0 0 50,730 0 4,769,268 0
State Taxes...... 235,208 0 235,208 0 0 0 0
Depreciation--
Other............ 0 0 0 39,581 26,238 0 0
Depreciation--
Property......... 1,548,813 349,465(a) 1,898,278 0 0 0 0
Amortization..... 7,368 0 7,368 0 0 0 540,120 (h)
Transaction
Costs............ 125,926 0 125,926 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
Total Expenses.. 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650 (1,438,960)
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) $ (949,635)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 0 17,271 0 0 0 0
Gain on Sale of
Properties....... 0 0 0 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 (215,797) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
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) (949,635)
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) $(1,198,314)
=========== ========== =========== ========== ========== ========== ===========
<CAPTION>
Historical
CNL Income
Combined Fund II, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ----------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $14,523,161 $ 420,201 $ 3,245 (j) $14,946,607
Fees............. 1,256,304 0 (7,931)(k) 1,248,373
Interest and
Other Income..... 7,687,325 13,671 0 7,700,996
------------ ----------- ------------------ ------------
Total Revenue... $23,466,790 $433,872 $ (4,686) $23,895,976
Expenses:
General and
Administrative... 4,669,012 39,341J (20,452)(l),(m) 4,687,901
Management and
Advisory Fees.... 0 0 0 (n) 0
Fees to Related
Parties.......... 23,115 0 0 23,115
Interest
Expense.......... 4,819,998 0 0 4,819,998
State Taxes...... 235,208 15,526 4,881 (o) 255,615
Depreciation--
Other............ 65,819 0 0 65,819
Depreciation--
Property......... 1,898,278 82,317 50,758 (p) 2,031,353
Amortization..... 547,488 732 0 548,220
Transaction
Costs............ 125,926 32,324 0 158,250
------------ ----------- ------------------ ------------
Total Expenses.. 12,384,844 170,240 35,187 12,590,271
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties and
Provision for
Losses on
Properties....... $11,081,946 $ 263,632 $ (39,873) $11,305,705
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 107,239L (12,341)(q) 112,169
Gain on Sale of
Properties....... 0 192,752 0 192,752
Provision For
Loss on
Properties....... (215,797) 0 0 (215,797)
------------ ----------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 10,883,420 563,623 (52,214) 11,394,829
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ----------- ------------------ ------------
Net
Earnings(Losses).. $10,883,420 $ 563,623 $ (52,214) $11,394,829
============ =========== ================== ============
</TABLE>
S-21
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
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
============ =========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 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
============ =========== ============ ========== ========== ============ ===========
Weighted average
units
outstanding
during period... n/a n/a n/a n/a n/a n/a n/a
============ =========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,401 n/a 37,347,401 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 n/a 37,348,464 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... 14,237,405 n/a n/a n/a n/a n/a n/a
Cash
distributions
declared per
$10,000
Investment...... 191 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 $ -- $ -- $ -- 0
Mortgages/notes
receivable...... $ 41,269,740 0 $ 41,269,740 $ -- $ -- $247,896,287 $ 0
Receivables,
net............. $ 548,862 0 $ 548,862 $7,141,967 $5,457,493 $ 1,969,339 (148,629)(w)
Investment
in/due from
joint ventures.. $ 1,083,564 0 $ 1,083,564 $ -- $ -- $ -- 0
Total assets.... $708,694,145 $33,656,518(u) $742,350,663 $8,223,820 $6,308,406 $264,700,433 $31,308,433(v1),(w)
Total
liabilities/minority
interest........ $ 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 $31,728,803(v1),(x)
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund II, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- ------------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 542 37 n/a 579
============== =========== ==================== ==================
Earnings per
share/unit...... $ n/a $ 11.27 $ n/a $ 0.26
============== =========== ==================== ==================
Book value per
share/unit...... $ n/a $ 353.78 $ n/a $ 16.33
============== =========== ==================== ==================
Dividends per
share/unit...... $ n/a $ 10.31 $ n/a $ n/a
============== =========== ==================== ==================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 3.23x
============== =========== ==================== ==================
Weighted average
units
outstanding
during period... n/a 50,000 n/a n/a
============== =========== ==================== ==================
Weighted average
shares
outstanding
during period... 43,497,401 n/a 1,181,883 44,679,284 (r)
============== =========== ==================== ==================
Shares
outstanding..... 43,498,464 n/a 1,181,883 44,680,347
============== =========== ==================== ==================
Cash
distributions
declared:....... n/a 515,629 n/a $ 19,395,878 (s)
==================
Cash
distributions
declared per
$10,000
Investment...... n/a 206 n/a $ 217 (t)
==================
Balance sheet
data:
Real estate
assets, net..... $ 647,547,023 $12,266,850 $7,169,752 (v2) $ 666,983,625
Mortgages/notes
receivable...... $ 289,166,027 $ -- $ 0 $ 289,166,027
Receivables,
net............. $ 14,969,032 $ 61,742 $ (169,101)(y) $ 14,861,673
Investment
in/due from
joint ventures.. $ 1,083,564 $ 4,342,183 $1,010,097(v2) $ 6,435,844
Total assets.... $1,052,891,755 $18,440,817 $5,779,694 (v2),(y) $1,077,112,266
Total
liabilities/minority
interest........ 346,929,801 $ 751,942 $ (169,101)(y) $ 347,512,642
Total equity.... $ 705,961,954 $17,688,875 $5,948,795 (v2) $ 729,599,624
</TABLE>
S-22
<PAGE>
- --------
(a) Represents rental and earned income of $2,339,153 and depreciation
expense of $394,465 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
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<CAPTION>
<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 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
</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>
<CAPTION>
<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>
(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)
<TABLE>
<S> <C>
Amortization of goodwill $540,120
</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.
S-23
<PAGE>
(j) Represents $3,245 in accrued rental income resulting from the straight-
lining of scheduled rent increases throughout the lease terms for the
leases acquired from the Income Fund as if the leases had been acquired
on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<CAPTION>
<S> <C>
Management fees $ 0
Reimbursement of administrative costs (7,931)
-------
$(7,931)
=======
</TABLE>
(l) Represents the elimination of $7,931 in administrative costs reimbursed
by the Income Fund to the Advisor.
(m) Represents savings of $12,521 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports
for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income Fund
to the Advisor.
(o) Represents additional state income taxes of $4,881 resulting from
assuming that acquisitions of properties that had been operational when
APF acquired them from January 1, 1999 through May 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 Fund 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 $50,758 as a result
of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated using
the straight-line method over the remaining useful lives of the
properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $12,341
as a result of adjusting the historical basis of the real estate owned
by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings owned indirectly by the
Income Fund is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(r) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 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.
S-24
<PAGE>
(v) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Income Fund Total
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Shares Offered 3,800,000 2,350,000 1,181,883.5 7,331,883.5
Exchange Value $20 $20 $20 $20
----------- ----------- ----------- ------------
Share Consideration $76,000,000 $47,000,000 $23,637,670 $146,637,670
Cash Consideration -- -- 295,000 295,000
APF Transaction Costs 5,536,060 3,423,616 1,743,324 10,703,000
----------- ----------- ----------- ------------
Total Purchase Price $81,536,060 $50,423,616 $25,675,994 $157,635,670
=========== =========== =========== ============
Allocation of Purchase
Price:
----------------------
Net Assets --
Historical $ 7,141,252 $10,006,878 $17,688,875 $ 34,837,005
Purchase Price
Adjustments:
Land and buildings on
operating leases 5,712,277 5,712,277
Net investment in
direct financing
leases 1,457,475 1,457,475
Investment in joint
ventures 1,010,097 1,010,097
Accrued rental income (179,999) (179,999)
Intangibles and other
assets (2,792,876) (12,731) (2,805,607)
Goodwill* 43,209,614 -- 43,209,614
Excess purchase price 74,394,808 -- -- 74,394,808
----------- ----------- ----------- ------------
Total Allocation $81,536,060 $50,423,616 $25,675,994 $157,635,670
=========== =========== =========== ============
</TABLE>
* Goodwill represents the portion of the purchase price which is assumed
to relate to ongoing value of the debt business.
The APF Transaction costs of $10,703,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess purchase
price paid for the Advisor to a related party of $74,394,808 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 43,209,614 relating to the acquisition of the CNL
Financial Services Group is being amortized over 20 years. APF did not acquire
any intangibles as part of any of the acquisitions. The entries were as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1. Common Stock (CFA, CFS, CFC)--Class A 8,600
Common Stock (CFA, CFS, CFC)--Class B 4,825
APIC (CFA, CFS, CFC) 13,857,645
Retained Earnings 3,277,060
Accumulated distributions in excess of earnings 74,394,808
Goodwill for CFC (Intangibles and other assets) 43,209,614
CFC/CFS Org Costs/Other Assets 2,792,876
Cash to pay APF transaction costs 8,959,676
APF Common Stock 61,500
APF APIC 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital 17,688,875
Land and buildings on operating leases 5,712,277
Net investment in direct financing leases 1,457,475
Investment in joint ventures 1,010,097
Accrued rental income 179,999
Intangibles and other assets 12,731
Cash to pay APF Transaction costs 1,743,324
Cash consideration to Income Funds 295,000
APF Common Stock 11,819
APF APIC 23,625,851
(To record acquisition of Income Fund)
</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 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.
(y) Represents the elimination by the Income Fund of $169,101 in related
party payables recorded as receivables by the Advisor.
S-25
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND II, LTD.
The following table sets forth certain financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
II, Ltd." in this supplement.
<TABLE>
<CAPTION>
Quarter Ended
March 31, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 541,111 $ 565,190 $2,337,414 $ 2,547,854 $ 2,455,884 $ 2,455,754 $ 2,323,678
Net income (2).......... 563,623 386,521 1,733,739 3,639,880 1,866,961 1,838,517 1,925,517
Cash distributions
declared (3)........... 515,629 1,747,628 3,294,507 2,376,000 2,376,000 2,376,000 2,376,000
Net income per unit
(2).................... 11.19 7.64 34.32 72.18 36.97 36.40 38.14
Cash distributions
declared per unit (3).. 10.31 34.95 65.89 47.52 47.52 47.52 47.52
GAAP book value per
unit................... 353.78 356.81 352.82 384.03 358.76 368.94 379.69
Weighted average number
of Limited Partner
units outstanding...... 50,000 50,000 50,000 50,000 50,000 50,000 50,000
<CAPTION>
March 31, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $18,440,817 $19,825,331 $18,392,911 $19,959,059 $18,671,318 $19,110,615 $19,736,258
Total partners'
capital................ 17,688,875 17,840,542 17,640,881 19,201,649 17,937,769 18,446,808 18,984,291
</TABLE>
- --------
(1) Revenues include equity in earnings of joint ventures.
(2) Net income for the quarter ended March 31, 1998 and the year ended December
31, 1998 has been reduced by a real estate disposition fee of $41,150 as a
result of 1997 sales of two restaurant properties. Net income for the
quarter ended March 31, 1999 and for the years ended December 31, 1997 and
1994, includes $192,752, $1,476,124 and $70,554, respectively, from gain on
sale of land and buildings. In addition, net income for the year ended
December 31, 1994, includes $29,904 from a loss on sale of land and
building. Net income for the years ended December 31, 1997 and 1994 also
includes lease termination income of $214,000 and $198,482, respectively,
recognized by the Income Fund in connection with consideration the Income
Fund received for releasing the former tenants from their obligations under
the terms of the leases of three of the restaurant properties sold.
(3) Distributions for the quarter ended March 31, 1998, and the year ended
December 31, 1998 include a special distribution to the Limited Partners of
$1,232,003 as a result of the distribution of net sales proceeds from the
1997 sales of two restaurant properties.
S-26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND II, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
November 13, 1986, to acquire for cash, either directly or through joint
venture arrangements, both newly constructed and existing restaurant
properties, as well as land upon which restaurants were to be constructed,
which are leased primarily to operators of national and regional fast-food
restaurant chains. The leases generally are triple-net leases, with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of 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
S-27
<PAGE>
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.
S-28
<PAGE>
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
S-29
<PAGE>
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
S-30
<PAGE>
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
S-31
<PAGE>
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
S-32
<PAGE>
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.
S-33
<PAGE>
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
S-34
<PAGE>
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.
S-35
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998....... F-1
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998..................................................................... F-2
Condensed Statements of Partner's Capital for the Quarters Ended March 31,
1999 and for the Year Ended December 31, 1998............................ F-3
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998................................................................. F-4
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998............................................................ F-5
Report of Independent Accountants......................................... F-7
Balance Sheets as of December 31, 1998 and 1997........................... F-8
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-9
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996............................................................ F-10
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................. F-12
Unaudited Pro Forma Financial Information................................. F-21
Unaudited Pro Forma Balance Sheet as of March 31, 1999.................... F-22
Unaudited Pro Forma Statement of Earnings for the Quarter Ended March 31,
1999..................................................................... F-24
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998..................................................................... F-26
Unaudited Pro Forma Statement of Cash Flows for the Quarter Ended March 31
, 1999................................................................... F-28
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................. F-30
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-32
</TABLE>
<PAGE>
CNL INCOME FUND 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-1
<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-2
<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-3
<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-4
<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-5
<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. 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-6
<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-7
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $12,835,304 $13,164,568
Investment in joint ventures.......................... 4,353,427 3,568,155
Mortgage note receivable.............................. 6,872 42,734
Cash and cash equivalents............................. 889,891 470,194
Restricted cash....................................... -- 2,470,175
Receivables, less allowance for doubtful accounts of
$55,435 and $83,254.................................. 122,560 80,577
Prepaid expenses...................................... 4,801 5,510
Lease costs, less accumulated amortization of $14,889
and $11,520.......................................... 5,674 9,043
Accrued rental income................................. 174,382 148,103
----------- -----------
$18,392,911 $19,959,059
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 4,621 $ 7,170
Accrued and escrowed real estate taxes payable........ 8,065 4,656
Distributions payable................................. 515,629 594,000
Due to related parties................................ 183,303 126,284
Rents paid in advance and deposits.................... 40,412 25,300
----------- -----------
Total liabilities..................................... 752,030 757,410
Partners' capital..................................... 17,640,881 19,201,649
----------- -----------
$18,392,911 $19,959,059
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $1,773,925 $2,024,119 $2,224,500
Contingent rental income................... 51,029 68,920 79,313
Interest and other income.................. 80,486 64,900 21,075
---------- ---------- ----------
1,905,440 2,157,939 2,324,888
---------- ---------- ----------
Expenses:
General operating and administrative....... 160,220 137,924 131,628
Professional services...................... 34,731 21,576 26,634
Bad debt expense........................... -- 27,965 --
Real estate taxes.......................... -- 410 4,647
State and other taxes...................... 14,733 10,403 4,255
Depreciation and amortization.............. 332,633 399,820 421,759
Transaction costs.......................... 16,208 -- --
---------- ---------- ----------
558,525 598,098 588,923
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Gain on Sale of Land and
Buildings, Real Estate Disposition Fees, and
Lease Termination Income.................... 1,346,915 1,559,841 1,735,965
Equity in Earnings of Joint Ventures......... 431,974 389,915 130,996
Gain on Sale of Land and Buildings........... -- 1,476,124 --
Real Estate Disposition Fees................. (45,150) -- --
Lease Termination Income..................... -- 214,000 --
---------- ---------- ----------
Net Income................................... $1,733,739 $3,639,880 $1,866,961
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 17,789 $ 30,736 $ 18,670
Limited partners........................... 1,715,950 3,609,144 1,848,291
---------- ---------- ----------
$1,733,739 $3,639,880 $1,866,961
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 34.32 $ 72.18 $ 36.97
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................... 50,000 50,000 50,000
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $162,000 $161,705 $25,000,000 $(20,317,377) $16,130,302 $(2,689,822) $18,446,808
Distributions to
limited partners
($47.52 per limited
partner unit)......... -- -- -- (2,376,000) -- -- (2,376,000)
Net income............. -- 18,670 -- -- 1,848,291 -- 1,866,961
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 162,000 180,375 25,000,000 (22,693,377) 17,978,593 (2,689,822) 17,937,769
Distributions to
limited partners
($47.52 per limited
partner unit)......... -- -- -- (2,376,000) -- -- (2,376,000)
Net income............. -- 30,736 -- -- 3,609,144 -- 3,639,880
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 162,000 211,111 25,000,000 (25,069,377) 21,587,737 (2,689,822) 19,201,649
Distributions to
limited partners
($65.89 per limited
partner unit)......... -- -- -- (3,294,507) -- -- (3,294,507)
Net income............. -- 17,789 -- -- 1,715,950 -- 1,733,739
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $162,000 $228,900 $25,000,000 $(28,363,884) $23,303,687 $(2,689,822) $17,640,881
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............ $ 1,796,989 $ 2,054,519 $ 2,295,531
Distributions from joint ventures..... 482,671 147,995 164,718
Cash paid for expenses................ (227,335) (80,744) (130,042)
Interest received..................... 83,366 36,142 17,524
----------- ----------- -----------
Net cash provided by operating
activities.......................... 2,135,691 2,157,912 2,347,731
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
buildings............................ -- 4,659,078 --
Proceeds received from tenant in
connection with termination of
leases............................... -- 214,000 --
Additions to land and buildings on
operating leases..................... -- (29,526) (11,107)
Investment in joint ventures.......... (835,969) (2,136,289) --
Return of capital from joint venture.. -- 124,440 --
Collections on mortgage note
receivable........................... 35,183 -- --
Decrease (increase) in restricted
cash................................. 2,457,670 (2,457,670) 25,000
Payment of lease costs................ -- (4,507) (1,930)
Other................................. -- -- (25,000)
----------- ----------- -----------
Net cash provided by (used in)
investing activities................ 1,656,884 369,526 (13,037)
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from loans from corporate
general partner...................... -- 721,000 203,900
Repayment of loans from corporate
general partner...................... -- (721,000) (203,900)
Distributions to limited partners..... (3,372,878) (2,376,000) (2,376,000)
----------- ----------- -----------
Net cash used in financing
activities.......................... (3,372,878) (2,376,000) (2,376,000)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ 419,697 151,438 (41,306)
Cash and Cash Equivalents at Beginning
of Year................................ 470,194 318,756 360,062
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 889,891 $ 470,194 $ 318,756
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 1,733,739 $ 3,639,880 $ 1,866,961
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense...................... -- 27,965 --
Depreciation.......................... 329,264 395,837 417,776
Amortization.......................... 3,369 3,983 3,983
Gain on sale of land and buildings.... -- (1,476,124) --
Lease termination income.............. -- (214,000) --
Equity in earnings of joint ventures,
net of distributions................. 50,697 (241,920) 33,722
Increase in receivables............... (28,799) (4,166) (8,803)
Decrease (increase) in prepaid
expenses............................. 709 (691) (1,570)
Increase in accrued rental income..... (26,279) (30,746) (33,234)
Decrease in other assets.............. -- -- 1,750
Increase (decrease) in accounts
payable and accrued expenses......... 860 (2,304) 4,014
Increase in due to related parties.... 57,019 81,206 35,824
Increase (decrease) in rents paid in
advance and deposits................. 15,112 (21,008) 27,308
----------- ----------- -----------
Total adjustments.................... 401,952 (1,481,968) 480,770
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 2,135,691 $ 2,157,912 $ 2,347,731
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Mortgage note accepted as consideration
in sale of land and building.......... $ -- $ 42,000 $ --
=========== =========== ===========
Deferred real estate disposition fees
incurred and unpaid at end of period.. $ 45,150 $ -- $ --
=========== =========== ===========
Distributions declared and unpaid at
December 31........................... $ 515,629 $ 594,000 $ 594,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund II, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food restaurant
chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using the operating method. Under the operating
method, land and building leases are recorded at cost, revenue is recognized as
rentals are earned and depreciation is charged to operations as incurred.
Buildings are depreciated on the straight-line method over their estimated
useful lives of 30 years. When scheduled rentals vary during the lease term,
income is recognized on a straight-line basis so as to produce a constant
periodic rent over the lease term commencing on the date the property is placed
in service.
Accrued rental income represents the aggregate amount of income recognized
on a straight-line basis in excess of scheduled rental payments to date.
Whenever a tenant defaults under the terms of its lease, or events or changes
in circumstance indicate that the tenant will not lease the property through
the end of the lease term, the Partnership either reserves or writes-off the
cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
plus any accrued rental income, are removed from the accounts and gains or
losses from sales are reflected in income. The general partners of the
Partnership review the properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through operations. The general partners determine whether an
impairment in value has occurred by comparing the estimated future undiscounted
cash flows, including the residual value of the property, with the carrying
cost of the individual property. If an impairment is indicated, a loss will be
recorded for the amount by which the carrying value of the asset exceeds its
fair market value. Although the general partners have made their best estimate
of these factors based on current conditions, it is reasonably possible that
changes could occur in the near term which could adversely affect the general
partners' estimate of net cash flows expected to be generated from its
properties and the need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership continues to pursue collection of such amounts. If amounts are
subsequently determined to be uncollectible, the corresponding receivable and
allowance for uncollectible accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership's investments in Kirkman Road
Joint Venture, Holland Joint Venture and Show Low Joint Venture, and the
properties in Arvada, Colorado; Mesa, Arizona; Smithfield, North Carolina;
Vancouver, Washington; Overland Park, Kansas; and Memphis, Tennessee, each of
F-12
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
which is held as tenants-in-common with affiliates, are accounted for using the
equity method since the Partnership shares control with affiliates which have
the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Lease Costs--Lease incentive costs and brokerage and legal fees associated
with negotiating new leases are amortized over the terms of the new leases
using the straight-line method. When a property is sold or a lease is
terminated, the related lease cost, if any, net of accumulated amortization is
removed from the accounts and charged against income.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
2. Leases:
The Partnership leases its land or land and buildings primarily to operators
of national and regional fast-food restaurants. The leases are accounted for
under the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." The leases have been classified as operating leases.
Substantially all leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant generally pays all property taxes
and assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage.
The lease options generally allow tenants to renew the leases for two to
four successive five-year periods subject to the same terms and conditions as
the initial lease. Most leases also allow the tenant to purchase the property
at fair market value after a specified portion of the lease has elapsed.
F-13
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................... $ 6,608,400 $ 6,608,400
Buildings.......................................... 9,858,263 9,858,263
----------- -----------
16,466,663 16,466,663
Less accumulated depreciation...................... (3,631,359) (3,302,095)
----------- -----------
$12,835,304 $13,164,568
=========== ===========
</TABLE>
In June 1997, the Partnership sold its property in Eagan, Minnesota, to the
tenant, for $668,033 and received net sales proceeds of $665,882, of which
$42,000 were in the form of a promissory note, resulting in a gain of $158,251
for financial reporting purposes. This property was originally acquired by the
Partnership in August 1987 and had a cost of approximately $601,100, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold the property for approximately $64,800 in excess of its
original purchase price. In October 1997, the Partnership used the net sales
proceeds to acquire a property in Mesa, Arizona, as tenants-in-common (see Note
4).
In addition, during 1997, the Partnership sold its properties in
Jacksonville, Plant City and Avon Park, Florida; its property in Mathis, Texas
and two properties in Farmington Hills, Michigan to third parties for aggregate
sales prices of $4,162,006 and received aggregate net sales proceeds (net of
$18,430, which represents amounts due to the former tenant for prorated rent)
of $4,035,196, resulting in aggregate gains of $1,317,873 for financial
reporting purposes. These six properties were originally acquired by the
Partnership during 1987 and had aggregate costs of approximately $3,338,800,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold these six properties for approximately $714,400, in the
aggregate, in excess of their original aggregate purchase prices. During 1997,
the Partnership reinvested approximately $1,512,400 of these net sales proceeds
in a property in Vancouver, Washington, and a property in Smithfield, North
Carolina, as tenants-in-common with affiliates of the General Partners (see
Note 4). In January 1998, the Partnership reinvested a portion of these net
sales proceeds in a property in Overland Park, Kansas, and a property in
Memphis, Tennessee, as tenants-in-common with affiliates of the General
Partners (see Note 4). In connection with the sale of both of the Farmington
Hills, Michigan properties, the Partnership also received $214,000 as a lease
termination fee from the former tenant in consideration of the Partnership's
releasing the tenant from its obligation under the terms of the leases.
Some of the leases provide for escalating guaranteed minimum rents
throughout the lease terms. Income from these scheduled rent increases is
recognized on a straight-line basis over the terms of the leases. For the years
ended December 31, 1998, 1997, and 1996, the Partnership recognized $26,279,
$30,746, and $33,234, respectively, of such income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,617,078
2000............................................................. 1,545,876
2001............................................................. 1,561,629
2002............................................................. 1,394,850
2003............................................................. 1,146,347
Thereafter....................................................... 5,112,565
-----------
$12,378,345
===========
</TABLE>
F-14
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
4. Investment in Joint Ventures:
The Partnership has a 50 percent interest, a 49 percent interest and a 64
percent interest in the profits and losses of Kirkman Road Joint Venture,
Holland Joint Venture and Show Low Joint Venture, respectively. The remaining
interests in Holland Joint Venture and Show Low Joint Venture are held by
affiliates of the general partners. The Partnership also has a 33.87% interest
in a property in Arvada, Colorado, with an affiliate of the general partners,
as tenants-in-common. The Partnership accounts for its investment in this
property using the equity method since the Partnership shares control with an
affiliate. Amounts relating to its investment are included in investment in
joint ventures.
In January 1997, Show Low Joint Venture, in which the Partnership owns a 64
percent interest, sold its property to the tenant for $970,000, resulting in a
gain to the joint venture of approximately $360,000 for financial reporting
purposes. The property was originally contributed to Show Low Joint Venture in
July 1990 and had a total cost of approximately $663,500, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the joint venture sold
the property for approximately $306,500 in excess of its original purchase
price. In June 1997, Show Low Joint Venture reinvested $782,413 of the net
sales proceeds in a Darryl's property in Greensboro, North Carolina. As of
December 31, 1997, the Partnership had received approximately $124,400
representing a return of capital for its pro-rata share of the uninvested net
sales proceeds. As of December 31, 1998, the Partnership owned a 64 percent
interest in the profits and losses of the joint venture.
In October 1997, the Partnership used the net sales proceeds from the sale
of the property in Eagan, Minnesota (see Note 3) to acquire a property in Mesa,
Arizona, as tenants-in-common with an affiliate of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with an affiliate, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned an approximate 58 percent interest in
this property.
In December 1997, the Partnership used the net sales proceeds from the sale
of one of the properties in Farmington Hills, Michigan, to acquire a property
in Smithfield, North Carolina, as tenants-in-common with an affiliate of the
general partners. The Partnership accounts for its investment in this property
using the equity method since the Partnership shares control with an affiliate,
and amounts relating to its investment are included in investment in joint
ventures. As of December 31, 1998, the Partnership owned a 47 percent interest
in this property.
In addition, in December 1997, the Partnership used the net sales proceeds
from the sale of the property in Plant City, Florida, to acquire a property in
Vancouver, Washington, as tenants-in-common with affiliates of the general
partners. The Partnership accounts for its investment in this property using
the equity method since the Partnership shares control with affiliates, and
amounts relating to its investment are included in investment in joint
ventures. As of December 31, 1998, the Partnership owned an approximate 37
percent interest in this property.
F-15
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In addition, in January 1998, the Partnership used the net sales proceeds
from the sales of the properties in Jacksonville, Florida and Mathis, Texas, to
acquire a 39.39% and a 13.38% interest in a property in Overland Park, Kansas,
and a property in Memphis, Tennessee, respectively, as tenants-in-common with
affiliates of the general partners. The Partnership accounts for its
investments in these properties using the equity method since the Partnership
shares control with affiliates, and amounts relating to its investments are
included in investment in joint ventures.
Kirkman Road Joint Venture, Holland Joint Venture, Show Low Joint Venture
and the Partnership and affiliates, as tenants-in-common in six separate
tenancy-in-common arrangements, each own and lease one property to an operator
of national fast-food or family-style restaurants. The following presents the
combined, condensed financial information for the joint ventures and the six
properties held as tenants-in-common with affiliates at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Land and buildings on operating leases, less accu-
mulated depreciation.............................. $ 8,410,940 $7,091,781
Net investment in direct financing leases.......... 2,121,822 518,399
Cash............................................... 37,128 56,815
Receivables........................................ 1,570 4,685
Accrued rental income.............................. 207,239 102,913
Other assets....................................... 1,069 418
Liabilities........................................ 32,229 31,673
Partners' capital.................................. 10,747,539 7,743,338
Revenues........................................... 1,254,276 399,579
Gain on sale of land and building.................. -- 360,002
Net income......................................... 1,051,988 687,021
</TABLE>
The Partnership recognized income totalling $431,974, $389,915, and $130,996
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures and the properties held as tenants-in-common with affiliates.
5. Mortgage Note Receivable:
In connection with the sale in June 1997 of its property in Eagan,
Minnesota, the Partnership accepted a promissory note in the amount of $42,000.
The promissory note bears interest at a rate of 10.50% per annum and is
collateralized by personal property. Initially, the note was to be collected in
18 monthly installments of interest only and thereafter, the entire principal
balance shall become due. During 1998, the note was amended to require six
monthly installments of $7,368, including interest, commencing on July 1, 1998.
As of December 31, 1998 and 1997, the mortgage note receivable balance was
$6,872 and $42,734, including accrued interest of $56 and $734, respectively.
6. Restricted Cash:
As of December 31, 1997, remaining net sales proceeds of $2,470,175 from the
sales of several properties (see Note 3) including accrued interest of $12,505,
were being held in interest-bearing escrow accounts pending the release of
funds by the escrow agent to acquire additional properties on behalf of the
Partnership and to distribute net sales proceeds to the limited partners. In
1998, the funds were released from escrow to the Partnership and were used to
acquire two additional properties with affiliates of the general partners and
to make a special distribution to the limited partners (see note 4 and note 8).
F-16
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
7. Receivables:
In March 1996, the Partnership accepted a promissory note from the former
tenant of the property in Gainesville, Texas, in the amount of $96,502,
representing past due rental and other amounts, which had been included in
receivables and for which the Partnership had established an allowance for
doubtful accounts, and real estate taxes previously recorded as an expense by
the Partnership. Payments are due in 60 monthly installments of $2,156,
including interest at a rate of 11 percent per annum, commencing on June 1,
1996. Due to the uncertainty of the collectibility of this note, the
Partnership established an allowance for doubtful accounts and is recognizing
income as collected. As of December 31, 1998 and 1997, the balances in the
allowance for doubtful accounts of $55,330 and $74,590, respectively, including
accrued interest of $2,654 in 1998 and 1997, represent the uncollected amounts
under this promissory note.
8. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, noncumulative, noncompounded annual
return on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their cumulative
10% Preferred Return, plus the return of their adjusted capital contributions.
The general partners will then receive, to the extent previously subordinated
and unpaid, a one percent interest in all prior distributions of net cash flow
and a return of their capital contributions. Any remaining sales proceeds will
be distributed 95 percent to the limited partners and five percent to the
general partners. Any gain from the sale of a property not in liquidation of
the Partnership is, in general, allocated in the same manner as net sales
proceeds are distributable. Any loss from the sale of a property is, in
general, allocated first on a pro rata basis to partners with positive balances
in their capital accounts; and thereafter, 95 percent to the limited partners
and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
declared distributions to the limited partners of $3,294,507, $2,376,000, and
$2,376,000. Distributions for the year ended December 31, 1998, included
$1,232,003 as a result of the distribution of net sales proceeds from the 1997
sales of properties in Avon Park, Florida and Farmington Hills, Michigan. This
amount was applied toward the limited partners' cumulative 10% Preferred
Return. No distributions have been made to the general partners to date.
F-17
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
9. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.............................. $1,733,739 $3,639,880 $1,866,961
Depreciation for financial reporting
purposes in excess of depreciation for
tax reporting purposes................ 17,510 19,440 20,922
Gain on sale of land and buildings for
financial reporting purposes (in
excess of) less than gain for tax
reporting purposes.................... 335,644 (638,739) --
Equity in earnings of joint ventures
for tax reporting purposes less than
equity in earnings of joint ventures
for financial reporting purposes...... (32,934) (146,161) (1,240)
Capitalization of transaction costs for
tax reporting purposes................ 16,208 -- --
Allowance for doubtful accounts........ (27,819) (42,782) 25,225
Accrued rental income.................. (26,279) (30,746) (33,234)
Rents paid in advance.................. 18,112 (21,008) 22,508
---------- ---------- ----------
Net income for federal income tax
purposes.............................. $2,034,181 $2,779,884 $1,901,142
========== ========== ==========
</TABLE>
10. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors,
Inc. (hereinafter referred to as the "Affiliate") performed certain services
for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's Properties pursuant to a property
management agreement with the Partnership. In connection therewith, the
Partnership agreed to pay the Affiliate an annual, noncumulative, subordinated
property management fee of one-half of one percent of the Partnership assets
under management (valued at cost) annually. The property management fee is
limited to one percent of the sum of gross operating revenues from properties
wholly owned by the Partnership and the Partnership's allocable share of gross
operating revenues from joint ventures and the properties held as tenants-in-
common with affiliates or competitive fees for comparable services. In
addition, these fees will be incurred and will be payable only after the
limited partners receive their aggregate, noncumulative 10% Preferred Return.
Due to the fact that these fees are noncumulative, if the limited partners do
not receive their 10% Preferred Return in any particular year, no property
management fees will be due or payable for such year. As a result of such
threshold no property management fees were incurred during the years ended
December 31, 1998, 1997, and 1996.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the
F-18
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
sale. Payment of the real estate disposition fee is subordinated to receipt by
the limited partners of their aggregate, cumulative 10% Preferred Return, plus
their adjusted capital contributions. For the year ended December 31, 1998, the
Partnership incurred $45,150 in deferred, subordinated, real estate disposition
fees as a result of the 1997 sales of properties in Avon Park, Florida and
Farmington Hills, Michigan. No deferred, subordinated, real estate disposition
fees were incurred for the years ended December 31, 1997 and 1996.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $86,009, $78,139 and $79,624 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
During 1997, the Partnership acquired a property in Mesa, Arizona, as
tenants-in-common with an affiliate of the general partners, for a purchase
price of $630,554 from CNL BB Corp., also an affiliate of the general partners.
CNL BB Corp. had purchased and temporarily held title to this property in order
to facilitate the acquisition of the property by the Partnership. The purchase
price paid by the Partnership represented the Partnership's percentage of
interest in the costs incurred by CNL BB Corp. to acquire and carry the
property, including closing costs.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership..... $ 76,326 $ 59,608
Accounting and administrative services................. 61,827 66,676
Deferred, subordinated real estate disposition fee..... 45,150 --
-------- --------
$183,303 $126,284
======== ========
</TABLE>
11. Concentration of Credit Risk:
The following schedule presents total rental income from individual lessees,
each representing more than ten percent of the Partnerships' total rental
income (including the Partnership's share of rental income from joint ventures
and the properties held as tenants-in-common with affiliates) for each of the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation........................ $485,839 $408,333 $403,875
Restaurant Management Services, Inc.............. 252,292 251,480 N/A
</TABLE>
In addition, the following schedule presents total rental and mortgage
interest income from individual restaurant chains, each representing more than
ten percent of the Partnership's total rental and mortgage interest income
(including the Partnership's share of rental income from joint ventures and
properties held as tenants-in-common with affiliates) for each of the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants..... $485,839 $408,333 $403,875
Popeyes Famous Fried Chicken Restaurants........ 252,292 251,480 N/A
Wendy's Old Fashioned Hamburger Restaurants..... N/A 381,567 421,165
Denny's......................................... N/A N/A 388,050
KFC............................................. N/A 278,348 358,463
</TABLE>
F-19
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental, mortgage interest, and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
12. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 2,393,267 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $23,548,652 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
13. Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 12 being adjusted to 1,196,634 shares valued at $20.00 per
APF share.
F-20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of the Advisor
and the CNL Restaurant Financial Services Group, and the acquisition of the
Income Fund (the acquisition of the Income Fund is referred to as the
"Acquisition"), and is based on estimates and assumptions set forth below in
the notes to such information which included pro forma adjustments. This
unaudited pro forma financial information has been prepared utilizing the
historical financial statements of APF, the historical combined financial
information of the Income Fund, the Advisor and CNL Restaurant Financial
Services Group (shown separately as CFS and CFC) and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, Income Fund, Advisor and CNL Restaurant Financial Services Group. The
pro forma balance sheet assumes that the Acquisition occurred on 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.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of March 31, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL
Historical Pro Forma Historical Financial
APF Adjustments Subtotal Advisor Services, Inc.
------------ ------------ ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... 475,787,661 58,749,637 (A) 534,537,298 0 0
Net Investment in Direct
Financing Leases....... 123,270,117 0 123,270,117 0 0
Mortgages and Notes
Receivable............. 41,269,740 0 41,269,740 0 0
Other Investments....... 16,199,792 0 16,199,792 0 0
Investment In Joint
Ventures............... 1,083,564 0 1,083,564 0 0
Cash and Cash
Equivalents............ 35,796,119 (25,093,119)(A) 10,703,000 591,712 552,415
Restricted
Cash/Certificates of
Deposit................ 2,007,278 0 2,007,278 0 0
Receivables (net
allowances)/Due from
Related Party.......... 548,862 0 548,862 7,141,967 5,457,493
Accrued Rental Income... 5,007,334 0 5,007,334 0 0
Other Assets............ 7,723,678 0 7,723,678 490,141 298,498
Goodwill................ 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Assets........... $708,694,145 $33,656,518 $742,350,663 $8,223,820 $6,308,406
============ =========== ============ ========== ==========
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 3,464,190 $ 0 $ 3,464,190 $ 576,531 $ 304,375
Accrued Construction
Costs Payable.......... 10,172,169 0 10,172,169 0 0
Distributions Payable... 0 0 0 119,808 0
Due to Related Parties.. 148,629 0 148,629 0 563,724
Income Tax Payable...... 0 0 0 0 0
Line of Credit/Notes
payable................ 34,150,000 33,656,518 (A) 67,806,518 386,229 0
Deferred Income......... 2,052,530 0 2,052,530 0 0
Rents Paid in Advance... 1,340,636 0 1,340,636 0 0
Minority Interest....... 280,970 0 280,970 0 0
Common Stock............ 373,483 0 373,483 0 0
Common Stock--Class A... 0 0 0 6,400 2,000
Common Stock--Class B... 0 0 0 3,600 724
Additional Paid-in-
capital................ 670,005,177 0 670,005,177 4,617,047 5,303,503
Accumulated
distributions in excess
of net earnings........ (13,293,639) 0 (13,293,639) 2,514,205 134,080
Partners Capital........ 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Liabilities and
Equity................ $708,694,145 $33,656,518 $742,350,663 $8,223,820 $6,308,406
============ =========== ============ ========== ==========
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of March 31, 1999
<TABLE>
<CAPTION>
Historical
CNL Combining Historical
Financial Pro Forma Combined CNL Income Pro Forma Adjusted
Corp. Adjustments APF Fund II, Ltd. Adjustments Pro Forma
------------ ------------ -------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... 0 0 534,537,298 12,266,850 5,712,277 (B2) 552,516,425
Net Investment in Direct
Financing Leases....... 0 0 123,270,117 -- 1,457,475 (B2) 124,727,592
Mortgages and Notes
Receivable............. 247,896,287 0 289,166,027 -- 0 289,166,027
Other Investments....... 6,353,482 0 22,553,274 0 0 22,553,274
Investment In Joint
Ventures............... 0 0 1,083,564 4,342,183 1,010,097 (B2) 6,435,844
Cash and Cash
Equivalents............ 4,896,688 (8,959,676)(B1) 7,784,139 899,137 (1,743,324)(B2) 6,644,952
(295,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 853,243 0 2,860,521 678,175 0 3,538,696
Receivables (net
allowances)
/Due from Related
Party.................. 1,969,339 (148,629)(C) 14,969,032 61,742 (169,101)(E) 14,861,673
Accrued Rental Income... 0 0 5,007,334 179,999 (179,999)(B2) 5,007,334
Other Assets............ 2,731,394 (2,792,876)(B1) 8,450,835 12,731 (12,731)(B2) 8,450,835
Goodwill................ 0 43,209,614 (B1) 43,209,614 0 0 43,209,614
------------ ------------ -------------- ----------- ------------ --------------
Total Assets........... $264,700,433 $ 31,308,433 $1,052,891,755 $18,440,817 $ 5,779,694 $1,077,112,266
============ ============ ============== =========== ============ ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 1,613,959 $ 0 $ 5,959,055 $ 44,012 $ 0 $ 6,003,067
Accrued Construction
Costs Payable.......... 0 0 10,172,169 0 0 10,172,169
Distributions Payable... 0 0 119,808 515,629 0 635,437
Due to Related Parties.. 31,310,681 (148,629)(C) 31,874,405 169,101 (169,101)(E) 31,874,405
Income Tax Payable...... 271,741 (271,741)(D) 0 0 0 0
Line of Credit/Notes
payable................ 226,937,481 0 295,130,228 0 0 295,130,228
Deferred Income......... 0 0 2,052,530 0 0 2,052,530
Rents Paid in Advance... 0 0 1,340,636 23,200 0 1,363,836
Minority Interest....... 0 0 280,970 0 0 280,970
Common Stock............ 0 61,500 (B1) 434,983 0 11,819 (B2) 446,802
Common Stock--Class A... 200 (8,600)(B1) 0 0 0 0
Common Stock--Class B... 501 (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 3,937,095 122,938,500(B1) 792,943,677 0 23,625,851 (B2) 816,569,528
(13,857,645)(B1)
Accumulated
distributions in excess
of net earnings........ 628,775 (3,277,060)(B1) (87,416,706) 0 0 (87,416,706)
(74,394,808)(B1)
271,741 (D)
Partners Capital........ 0 0 0 17,688,875 (17,688,875)(B2) 0
------------ ------------ -------------- ----------- ------------ --------------
Total Liabilities and
Equity................ $264,700,433 $ 31,308,433 $1,052,891,755 $18,440,817 $ 5,779,694 $1,077,112,266
============ ============ ============== =========== ============ ==============
</TABLE>
F-23
<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
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $12,184,008 $2,339,153(a) $14,523,161 $ 0 $ 0 $ 0
Fees................... 0 0 0 2,307,364 1,391,466 8,137
Interest and Other
Income................ 2,214,763 0 2,214,763 47,213 129,362 5,233,919
----------- ---------- ----------- ---------- ---------- ----------
Total Revenue.......... $14,398,771 $2,339,153 $16,737,924 $2,354,577 $1,520,828 $5,242,056
Expenses:
General and
Administrative
Expenses.............. 1,095,269 0 1,095,269 2,563,714 1,323,577 64,186
Management and Advisory
Fees.................. 697,364 0 697,364 0 0 611,196
Fees Paid to Related
Parties............... 0 0 0 23,326 292,575 0
Interest Expense....... 0 0 0 50,730 0 4,769,268
State Taxes............ 235,208 0 235,208 0 0 0
Depreciation--Other.... 0 0 0 39,581 26,238 0
Depreciation--
Property.............. 1,548,813 349,465(a) 1,898,278 0 0 0
Amortization........... 7,368 0 7,368 0 0 0
Transaction Costs...... 125,926 0 125,926 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
Total Expenses......... 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, 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)
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 17,271 0 17,271 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Provision For Loss on
Properties............ (215,797) 0 (215,797) 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
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)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 127,496 48,017 73,166
----------- ---------- ----------- ---------- ---------- ----------
Net Earnings (Losses)... $10,490,297 $1,989,688 $12,479,985 $ (195,278) $ (73,545) $ (129,428)
=========== ========== =========== ========== ========== ==========
Earnings Per
Share/Unit............. $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ==========
Book Value Per
Share/Unit............. $ 17.59 $ 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
=========== ========== =========== ========== ========== ==========
Ratio of Earnings to
Fixed Charges.......... 50.03x n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========== ==========
Wtd. Avg. Units
Outstanding............ 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
=========== ========== =========== ========== ========== ==========
Shares Outstanding...... 37,348,464 n/a 37,348,464 n/a n/a n/a
=========== ========== =========== ========== ========== ==========
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 Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund II, Ltd. Adjustments Pro Forma
----------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $14,523,161 $420,201 $ 3,245 (j) $ 14,946,607
Fees................... (2,450,663)(b),(c) 1,256,304 0 (7,931)(k) 1,248,373
Interest and Other
Income................ 62,068 (d) 7,687,325 13,671 0 7,700,996
----------- ----------- -------- --------- ------------
Total Revenue.......... $(2,388,595) $23,466,790 $433,872 $ (4,686) $ 23,895,976
Expenses:
General and
Administrative
Expenses.............. (377,734)(e) 4,669,012 39,341 (20,452)(l),(m) 4,687,901
Management and Advisory
Fees.................. (1,308,560)(f) 0 0 0 (n) 0
Fees Paid to Related
Parties............... (292,786)(g) 23,115 0 0 23,115
Interest Expense....... 0 4,819,998 0 0 4,819,998
State Taxes............ 0 235,208 15,526 4,881 (o) 255,615
Depreciation--Other.... 0 65,819 0 0 65,819
Depreciation--
Property.............. 0 1,898,278 82,317 50,758 (p) 2,031,353
Amortization........... 540,120 (h) 547,488 732 0 548,220
Transaction Costs...... 0 125,926 32,324 0 158,250
----------- ----------- -------- --------- ------------
Total Expenses......... (1,438,960) 12,384,844 170,240 35,187 12,590,271
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests,
Gain on Sale of
Properties and
Provision for
Losses on Properties... $ (949,635) $11,081,946 $263,632 $ (39,873) $ 11,305,705
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 0 17,271 107,239 (12,341)(q) 112,169
Gain on Sale of
Properties............ 0 0 192,752 0 192,752
Provision For Loss on
Properties............ 0 (215,797) 0 0 (215,797)
----------- ----------- -------- --------- ------------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... (949,635) 10,883,420 563,623 (52,214) 11,394,829
Benefit/(Provision) for
Federal Income
Taxes................. (248,679)(i) 0 0 0 0
----------- ----------- -------- --------- ------------
Net Earnings (Losses)... $(1,198,314) $10,883,420 $563,623 $ (52,214) $ 11,394,829
=========== =========== ======== ========= ============
Earnings Per
Share/Unit............. $ n/a $ n/a $ 11.27 $ n/a $ 0.26
=========== =========== ======== ========= ============
Book Value Per
Share/Unit............. $ n/a $ n/a $ 353.78 $ n/a $ 16.33
=========== =========== ======== ========= ============
Dividends Per
Share/Unit............. $ n/a $ n/a $ 10.31 $ n/a $ n/a
=========== =========== ======== ========= ============
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.23x
=========== =========== ======== ========= ============
Wtd. Avg. Units
Outstanding............ n/a n/a 50,000 n/a n/a
=========== =========== ======== ========= ============
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,401 n/a 1,181,883 44,679,284 (r)
=========== =========== ======== ========= ============
Shares Outstanding...... 6,150,000 43,498,464 n/a 1,181,883 44,680,347
=========== =========== ======== ========= ============
Calculation of Pro Forma
Distributions: 0
Pro Forma Cash from
Operations from
Statement of Cash
Flows................. $(23,176,017)
Addback Pro Forma
Investments in Notes
Receivable............ 42,571,895
------------
Adjusted Pro Forma
Distributions Declared: $ 19,395,878 (s)
============
Pro Forma Wtd. Avg.
Dollars Outstanding.... $893,585,689 (t)
============
Pro Forma Cash
Distributions Declared
per $10,000
Investment............. $ 217 (u)
============
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 21,919,865(a) $55,049,526 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $21,919,865 $64,106,902 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 2,889,368(a) 6,931,658 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 2,889,368 12,298,325 11,435,228 7,966,916 25,677,829
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties and
Provision for Losses on
Properties............. $32,778,080 $19,030,497 $51,808,577 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Other Expenses......... 0 0 0 0 0 0
Provision For Loss on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
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
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $19,030,497 $51,182,905 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Units
Outstanding............ n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 8,163,685 34,811,904 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 34,757 37,372,684 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Calculation of Pro Forma
Distributions Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows.............
Addback Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable......
Addback Pro Forma
Investments in Notes
Receivable............
Adjusted Pro Forma
Distributions Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma
Adjustments APF Fund II, Ltd. Adjustments
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental and Earned Income................... $ 0 $55,049,526 $1,824,954 $ 12,979 (j)
Fees....................................... (32,715,768)(b),(c) 3,226,263 0 (27,846)(k)
Interest and Other Income.................. 207,144 (d) 32,221,925 80,486 0
------------ ----------- ---------- ---------
Total Revenue.............................. $(32,508,624) $90,497,714 $1,905,440 $ (14,867)
Expenses:
General and Administrative................. (4,241,719)(e) 15,939,556 194,951 (61,147)(l),(m)
Management and Advisory Fees............... (4,658,434)(f) 0 0 0 (n)
Fees to Related Parties.................... (2,161,897)(g) 858,787 0 0
Interest Expense........................... 0 21,498,589 0 0
State Taxes................................ 0 567,446 14,733 7,358 (o)
Depreciation--Other........................ 0 199,157 0 0
Depreciation--Property..................... (340,898)(r) 6,590,760 255,657 203,030 (p)
Amortization............................... 2,160,481 (h) 2,324,482 76,976 0
Transaction Costs.......................... 0 157,054 16,208 0
------------ ----------- ---------- ---------
Total Expenses............................. (9,242,467) 48,135,831 558,525 149,241
Operating Earnings (Losses) Before Equity in
Earnings of Joint Ventures/Minority
Interests, Gain on Sale of Properties and
Provision for Losses on Properties......... $(23,266,157) $42,361,883 $1,346,915 $(164,108)
<CAPTION>
Adjusted
Pro Forma
----------------
<S> <C>
Revenues:
Rental and Earned Income................... $ 56,887,459
Fees....................................... 3,198,417
Interest and Other Income.................. 32,302,411
----------------
Total Revenue.............................. $ 92,388,287
Expenses:
General and Administrative................. 16,073,360
Management and Advisory Fees............... 0
Fees to Related Parties.................... 858,787
Interest Expense........................... 21,498,589
State Taxes................................ 589,537
Depreciation--Other........................ 199,157
Depreciation--Property..................... 7,049,447
Amortization............................... 2,401,458
Transaction Costs.......................... 173,262
----------------
Total Expenses............................. 48,843,597
Operating Earnings (Losses) Before Equity in
Earnings of Joint Ventures/Minority
Interests, Gain on Sale of Properties and
Provision for Losses on Properties......... $ 43,544,690
Equity in Earnings of Joint
Venture/Minority Interest................. 0 (14,138) 431,974 (49,365)(q)
Gain on Sale of Properties................. 0 0 0 0
Gain on Securitization..................... 0 3,694,351 0 0
Other Expenses............................. 0 0 (45,150) 0
Provision For Loss on Properties........... 0 (611,534) 0 0
------------ ----------- ---------- ---------
Net Earnings (Losses) Before
Benefit/(Provision) for Federal Income
Taxes...................................... (23,266,157) 45,430,562 1,733,739 (213,473)
Benefit/(Provision) for Federal Income
Taxes..................................... 6,898,434 (i) 0 0 0
------------ ----------- ---------- ---------
Net Earnings (Losses)....................... $(16,367,723) $45,430,562 $1,733,739 $(213,473)
============ =========== ========== =========
Earnings Per Share/Unit..................... $ n/a $ n/a $ 34.67 $ n/a
============ =========== ========== =========
Book Value Per Share/Unit................... $ n/a $ n/a $ 352.82 $ n/a
============ =========== ========== =========
Dividends Per Share/Unit.................... $ n/a $ n/a $ 65.89 $ n/a
============ =========== ========== =========
Ratio of Earnings to Fixed Charges.......... n/a n/a n/a n/a
============ =========== ========== =========
Wtd. Avg. Units Outstanding................. n/a n/a 50,000 n/a
============ =========== ========== =========
Wtd. Avg. Shares Outstanding................ 6,150,000 40,961,904 n/a 1,181,883
============ =========== ========== =========
Shares Outstanding.......................... 6,150,000 43,522,684 n/a 1,181,883
============ =========== ========== =========
Calculation of Pro Forma Distributions Declared:
Pro Forma Cash from Operations from
Statement of Cashflows....................
Addback Pro Forma Net Cash Proceeds from
Securitization of Notes Receivable........
Addback Pro Forma Investments in Notes
Receivable................................
Adjusted Pro Forma Distributions Declared:
Pro Forma Wtd. Avg. Dollars Outstanding.....
Pro Forma Cash Distributions Declared per
$10,000 Investment.........................
Equity in Earnings of Joint
Venture/Minority Interest................. 368,471
Gain on Sale of Properties................. 0
Gain on Securitization..................... 3,694,351
Other Expenses............................. (45,150)
Provision For Loss on Properties........... (611,534)
----------------
Net Earnings (Losses) Before
Benefit/(Provision) for Federal Income
Taxes...................................... 46,950,828
Benefit/(Provision) for Federal Income
Taxes..................................... 0
----------------
Net Earnings (Losses)....................... $ 46,950,828
================
Earnings Per Share/Unit..................... $ 1.11
================
Book Value Per Share/Unit................... $ 16.37
================
Dividends Per Share/Unit.................... $ n/a
================
Ratio of Earnings to Fixed Charges.......... 3.12x
================
Wtd. Avg. Units Outstanding................. n/a
================
Wtd. Avg. Shares Outstanding................ 42,143,787 (s)
================
Shares Outstanding.......................... 44,704,567
================
Calculation of Pro Forma Distributions Declared:
Pro Forma Cash from Operations from
Statement of Cashflows.................... $ 57,596,984
Addback Pro Forma Net Cash Proceeds from
Securitization of Notes Receivable........ (265,871,668)
Addback Pro Forma Investments in Notes
Receivable................................ 288,590,674
----------------
Adjusted Pro Forma Distributions Declared: $ 80,315,990 (t)
================
Pro Forma Wtd. Avg. Dollars Outstanding..... $842,875,747 (u)
================
Pro Forma Cash Distributions Declared per
$10,000 Investment......................... $ 953 (v)
================
</TABLE>
F-27
<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 Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 10,490,297 $ 1,989,688 (a) $ 12,479,985 $ (195,278) $ (73,545) $ (129,428)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 1,548,813 349,465 (b) 1,898,278 39,581 0 0
Amortization expense... 7,368 0 7,368 0 26,238 424,697
Minority interest in
income of consolidated
joint venture......... 7,763 0 7,763 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 23,234 0 23,234 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 215,797 0 215,797 0 0 (73,166)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (82,660) 0 (82,660) (377,933) (242,251) (6,771)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (449,580)
Investment in notes
receivable............ 0 0 0 0 0 (42,571,895)
Collections on notes
receivable............ 0 0 0 0 0 6,417,907
Increase in restricted
cash.................. 0 0 0 0 0 (402,461)
Decrease in due from
related party......... 0 0 0 0 0 55,382
Decrease (increase) in
prepaid expenses...... 27,548 0 27,548 0 1,811 0
Decrease in net
investment in direct
financing leases...... 787,375 0 787,375 0 0 0
Increase in accrued
rental income......... (1,047,421) 0 (1,047,421) 0 0 0
Decrease (increase) in
intangibles and other
assets................ (30,554) 7,942
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 306,277 0 306,277 (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 0 71,853 25,550 0 0
Decrease in accrued
interest.............. 0 0 0 0 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 386,365 0 386,365 0 0 0
Increase (decrease) in
deferred rental
income................ 862,647 0 862,647 0 0 0
------------- ------------ ------------- ----------- --------- -----------
Total adjustments...... 3,114,959 349,465 3,464,424 (1,183,414) (344,708) (37,064,802)
------------- ------------ ------------- ----------- --------- -----------
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)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 0 0 0 0
Additions to land and
buildings on operating
leases................ (77,028,830) (58,749,637)(e) (135,778,467) (31,577) (10,092) 0
Investment in direct
financing leases...... (29,608,346) 0 (29,608,346) 0 0 0
Investment in joint
venture............... (117,662) 0 (117,662) 0 0 0
Aqcuisition of
businesses............
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 134,981
Investment in mortgage
notes receivable...... (1,388,463) 0 (1,388,463) 0 0 0
Collections on mortgage
note receivable....... 75,010 0 75,010 0 0 0
Investment in notes
receivable............ (1,087,483) 0 (1,087,483) 0 0 0
Collection on notes
receivable............ 239,596 0 239,596 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... 0 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------ ------------- ----------- --------- -----------
Net cash provided by
(used in) investing
activities............ (108,916,178) (58,749,637) (167,665,815) (31,577) (10,092) 134,981
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,735 0 210,735 1,288,673 20,572 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,142,237) 0 (1,142,237) 0 0 0
Payment of stock
issuance costs........ (722,001) 0 (722,001) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 36,587,245 22,953,518 (e) 59,540,763 0 0 49,730,934
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (2,385) (10,291,473)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (8,610) 0 (8,610) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0 0
Distributions to
stockholders.......... (14,237,405) 0 (14,237,405) 0 0 0
Other.................. (200,234) 0 (200,234) 0 0 (9,602)
------------- ------------ ------------- ----------- --------- -----------
Net cash provided by
(used in) financing
activities............ 7,907,204 22,953,518 30,860,722 1,288,673 18,187 39,429,859
Net increase in cash.... (87,403,718) (33,456,966) (120,860,684) (121,596) (410,158) 2,370,610
Cash at beginning of
year................... 123,199,837 0 123,199,837 713,308 962,573 2,526,078
------------- ------------ ------------- ----------- --------- -----------
Cash at end of year..... $ 35,796,119 $(33,456,966) $ 2,339,153 $ 591,712 $ 552,415 $ 4,896,688
============= ============ ============= =========== ========= ===========
</TABLE>
F-28
<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>
Historical
Combining CNL Income
Pro Forma Fund II, Pro Forma Adjusted
Adjustments Combined APF Ltd. Adjustments Pro Forma
----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(1,198,314)(a) $ 10,883,420 $ 563,623 $ (52,214)(a) $ 11,394,829
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 0 1,937,859 82,317 50,758 (b) 2,070,934
Amortization expense... 540,120 (c) 998,423 732 0 999,155
Minority interest in
income of consolidated
joint venture......... 0 7,763 0 0 7,763
Equity in earnings of
joint ventures, net of
distributions......... 0 23,234 11,244 12,341 (d) 46,819
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 (192,752) 0 (192,752)
Provision for loss on
land, buildings, and
direct financing
leases................ 0 142,631 0 0 142,631
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (709,615) 61,587 0 (648,028)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (449,580) 0 0 (449,580)
Investment in notes
receivable............ 0 (42,571,895) 0 0 (42,571,895)
Collections on notes
receivable............ 0 6,417,907 0 0 6,417,907
Increase in restricted
cash.................. 0 (402,461) 0 0 (402,461)
Decrease in due from
related party......... 0 55,382 0 0 55,382
Decrease (increase) in
prepaid expenses...... 0 29,359 (2,988) 0 26,371
Decrease in net
investment in direct
financing leases...... 0 787,375 0 0 787,375
Increase in accrued
rental income......... 0 (1,047,421) (5,617) 0 (1,053,038)
Decrease (increase) in
intangibles and other
assets................ 0 (22,612) 0 0 (22,612)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (768,267) 31,326 0 (736,941)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 97,403 (14,202) 0 83,201
Decrease in accrued
interest.............. 0 (362,877) 0 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 0 386,365 (17,212) 0 369,153
Increase (decrease) in
deferred rental
income................ 0 862,647 0 0 862,647
----------- ------------- --------- ----------- -------------
Total adjustments...... 540,120 (34,588,380) (45,565) 63,099 (34,570,846)
----------- ------------- --------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (658,194) (23,704,960) 518,058 10,885 (23,176,017)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 677,678 0 677,678
Additions to land and
buildings on operating
leases................ (135,820,136) 0 (135,820,136)
Investment in direct
financing leases...... 0 (29,608,346) 0 0 (29,608,346)
Investment in joint
venture............... 0 (117,662) 0 0 (117,662)
Acquisition of
businesses............ (8,959,675)(f) (8,959,675) (1,743,325)(g) (10,998,000)
(295,000)(g)
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 134,981 0 0 134,981
Investment in mortgage
notes receivable...... 0 (1,388,463) 0 0 (1,388,463)
Collections on mortgage
note receivable....... 0 75,010 6,817 0 81,827
Investment in notes
receivable............ 0 (1,087,483) 0 0 (1,087,483)
Collection on notes
receivable............ 0 239,596 0 0 239,596
Decrease in restricted
cash.................. 0 0 (677,678) 0 (677,678)
Increase in intangibles
and other assets...... 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 0 0 0
----------- ------------- --------- ----------- -------------
Net cash provided by
(used in) investing
activities............ (8,959,675) (176,532,178) 6,817 (2,038,325) (178,563,686)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 1,519,980 0 0 1,519,980
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,142,237) 0 0 (1,142,237)
Payment of stock
issuance costs........ 0 (722,001) 0 0 (722,001)
Proceeds from borrowing
on line of
credit/notes payable.. 0 109,271,697 0 0 109,271,697
Payment on line of
credit/notes payable.. 0 (22,874,147) 0 0 (22,874,147)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (8,610) 0 0 (8,610)
Distributions to
limited partners...... 0 0 (515,629) 0 (515,629)
Distributions to
stockholders.......... 0 (14,237,405) 0 0 (14,237,405)
Other.................. 0 (209,836) 0 0 (209,836)
----------- ------------- --------- ----------- -------------
Net cash provided by
(used in) financing
activities............ 0 71,597,441 (515,629) 0 71,081,812
Net increase in cash.... (9,617,869) (128,639,697) 9,246 (2,027,440) (130,657,891)
Cash at beginning of
year................... 0 127,401,796 889,891 0 128,291,687
----------- ------------- --------- ----------- -------------
Cash at end of year..... $(9,617,869) $ (1,237,901) $ 899,137 $(2,027,440) $ (2,366,204)
=========== ============= ========= =========== =============
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Restated Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income(loss)........ $ 32,152,408 $ 19,030,497 (a) $ 51,182,905 $10,656,379 $(468,133) $ 427,134
Adjustments to reconcile
net income(loss) to net
cash provided by (used
in) operating
activities:
Depreciation........... 4,042,290 2,889,368 (b) 6,931,658 119,923 79,234 0
Amortization expense... 11,808 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
leases................ 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) (2,187,652) 0 0 0
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 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 693,372 0 0 0
------------- ------------ ------------- ----------- ---------- -------------
Total adjustments...... 6,963,867 2,889,368 9,853,235 (3,608,563) 316,963 1,610,591
------------- ------------ ------------- ----------- ---------- -------------
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
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (58,749,637)(e) (258,851,304) (381,671) (236,372) 0
Investment in direct
financing leases...... (47,115,435) (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) (974,696) 0 0 0
Acquisition of
businesses
Purchase of other
investments........... (16,083,055) (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) (6,281,069) 0 0 0
0 0 0 0 0
Other.................. 0 0 200,000 0 0
------------- ------------ ------------- ----------- ---------- -------------
Net cash provided
by(used in) investing
activities............ (277,338,756) (58,749,637) (336,088,393) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0
0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 22,953,518 (e) 30,645,558 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) (34,073) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0
Distributions to
stockholders.......... (39,449,149) (39,449,149) (9,364,488) 0 0
Other.................. (95,101) (95,101) 0 24 (2,500,011)
------------- ------------ ------------- ----------- ---------- -------------
Net cash provided by
(used in) financing
activities............ 313,835,541 22,953,518 336,789,059 (8,200,077) 51,854 (700,074)
Net increase(decrease)
in cash................ 75,613,060 (13,876,254) 61,736,806 449,308 (335,688) 1,845,986
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 $(13,876,254) $ 109,323,583 $ 713,308 962,573 2,526,078
============= ============ ============= =========== ========== =============
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical Merger
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund II, Ltd. Adjustments Pro Forma
------------ ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income(loss)........ $(16,367,723)(a) $ 45,430,562 $1,733,739 $ (213,473)(a) $ 46,950,828
Adjustments to reconcile
net income(loss) to net
cash provided by(used
in) operating
activities:
Depreciation........... (340,898)(b) 6,789,917 329,264 203,030 (b) 7,322,211
Amortization expense... 2,160,481 (c) 4,474,565 3,369 4,477,934
Minority interest in
income of consolidated
joint venture......... 30,156 0 30,156
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 50,697 49,365 (d) 84,622
Loss(gain) on sale of
land, building, net
investment in direct
leases................ 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 1,009,576 0 1,009,576
Gain on
securitization........ (3,356,538) 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 265,871,668 0 265,871,668
Decrease(increase) in
other receivables..... (2,543,413) (28,799) (2,572,212)
Increase in accrued
interest income
included in notes
receivable............ (170,492) 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0
Investment in notes
receivable............ (288,590,674) 0 (288,590,674)
Collections on notes
receivable............ 23,539,641 0 23,539,641
Decrease in restricted
cash.................. 2,504,091 0 2,504,091
Decrease(increase) in
due from related
party................. (953,688) 0 (953,688)
Increase in prepaid
expenses.............. 7,246 709 7,955
Decrease in net
investment in direct
financing leases...... 1,971,634 0 1,971,634
Increase in accrued
rental income......... (2,187,652) (26,279) (2,213,931)
Increase in intangibles
and other assets...... (154,351) 0 (154,351)
Increase(decrease) in
accounts payable,
accrued expenses and
other
liabilities........... 846,680 860 847,540
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. (133,364) 57,019 (76,345)
Increase in accrued
interest.............. (77,968) 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 15,112 451,955
Decrease in deferred
rental income......... 693,372 0 693,372
------------ ------------- ---------- ----------- -------------
Total adjustments...... 1,819,583 9,991,809 401,952 252,395 10,646,156
------------ ------------- ---------- ----------- -------------
Net cash provided
by(used in) operating
activities............ (14,548,140) 55,422,371 2,135,691 38,922 57,596,984
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 0 2,385,941
Additions to land and
buildings on operating
leases................ (259,469,347) 0 (259,469,347)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435)
Investment in joint
venture............... (974,696) (835,969) (1,810,665)
Acquisition of
businesses (8,959,675)(f) (8,959,675) (1,743,325)(g) (10,998,000)
(295,000)(g)
Purchase of other
investments........... (16,083,055) 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 295,514 0 295,514
Proceeds from retained
interest and
securities, excluding
investment
income................ 212,821 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648)
Collections on mortgage
note receivable....... 291,990 35,183 327,173
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750)
Collections on
equipment notes
receivable............ 3,046,873 0 3,046,873
Decrease in restricted
cash.................. 0 2,457,670 2,457,670
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069)
0 0 0
Other.................. 200,000 0 200,000
------------ ------------- ---------- ----------- -------------
Net cash provided
by(used in) investing
activities............ (8,959,675) (343,174,536) 1,656,884 (2,038,325) (343,555,977)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 386,592,011 0 386,592,011
Contributions from
limited partners...... 0 0 0
0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925)
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 444,399,478 0 444,399,478
Payment on line of
credit/notes payable.. (411,813,826) 0 (411,813,826)
Retirement of shares of
common stock.......... (639,528) 0 (639,528)
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073)
Distributions to
limited partners...... 0 (3,372,878) (3,372,878)
Distributions to
stockholders.......... (48,813,637) 0 (48,813,637)
Other.................. (2,595,088) 0 (2,595,088)
------------ ------------- ---------- ----------- -------------
Net cash provided
by(used in) financing
activities............ 0 327,940,762 (3,372,878) 0 324,567,884
Net increase(decrease)
in cash................ (23,507,815) 40,188,597 419,697 (1,999,403) 38,608,891
Cash at beginning of
year................... 49,829,130 470,194 0 50,299,324
------------ ------------- ---------- ----------- -------------
Cash at end of year..... (23,507,815) 90,017,727 $ 889,891 $(1,999,403) $ 88,908,215
============ ============= ========== =========== =============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of 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 Income Fund. This unaudited pro forma financial
information has been prepared utilizing the historical financial statements of
APF and the historical combined financial information of the Advisor, CNL
Restaurant Financial Services Group and the Income Fund and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, the Advisor the CNL Restaurant Financial Services Group and the Income
Fund. The Pro Forma Balance Sheet was prepared as if the transactions described
above occurred on 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 Fund 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 Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
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
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
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.
(B) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Shares Offered.......... 3,800,000 2,350,000 1,181,883.5 7,331,883.5
Exchange Value.......... $ 20 $ 20 $ 20 $ 20
----------- ----------- ------------- --------------
Share Consideration..... $76,000,000 $47,000,000 $23,637,670 $146,637,670
Cash Consideration...... -- -- 295,000 295,000
APF Transaction Costs... 5,536,060 3,423,616 1,743,324 10,703,000
----------- ----------- ------------- --------------
Total Purchase
Price.............. $81,536,060 $50,423,616 $25,675,994 $157,635,670
=========== =========== ============= ==============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 7,141,252 $10,006,878 $17,688,875 $ 34,837,005
Purchase Price
Adjustments:
Land and buildings on
operating leases..... 5,712,277 5,712,277
Net investment in
direct financing
leases............... 1,457,475 1,457,475
Investment in joint
ventures............. 1,010,097 1,010,097
Accrued rental
income............... (179,999) (179,999)
Intangibles and other
assets............... (2,792,876) (12,731) (2,805,607)
Goodwill* ............ 43,209,614 -- 43,209,614
Excess purchase
price................ 74,394,808 -- -- 74,394,808
----------- ----------- ------------- --------------
Total Allocation.... $81,536,060 $50,423,616 $25,675,994 $157,635,670
=========== =========== ============= ==============
</TABLE>
--------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $10,703,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of
the Advisor, CNL Financial Services Group and the Income Fund. The
excess purchase price paid for the Advisor to a related party of
$74,394,808 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 43,209,614
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...................................... 74,394,808
Goodwill for CFC (Intangibles and other
assets)....................................... 43,209,614
CFC/CFS Org Costs/Other Assets............... 2,792,876
Cash to pay APF transaction costs............ 8,959,676
APF Common Stock............................. 61,500
APF APIC..................................... 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital............................... 17,688,875
Land and buildings on operating leases......... 5,712,277
Net investment in direct financing leases...... 1,457,475
Investment in joint ventures................... 1,010,097
Accrued rental income........................ 179,999
Intangibles and other assets................. 12,731
Cash to pay APF Transaction costs............ 1,743,324
Cash consideration to Income Fund............ 295,000
APF Common Stock............................. 11,819
APF APIC..................................... 23,625,851
(To record acquisition of the Income Fund)
</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 Income Fund of $169,101 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, 1999.
(a) Represents rental and earned income of $2,339,153 and depreciation
expense of $394,465 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.
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates......................... $ (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 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
</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>
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $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)
<TABLE>
<S> <C>
Amortization of goodwill..................................... $540,120
</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 $3,245 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees.............................................. $ 0
Reimbursement of administrative costs........................ (7,931)
-------
$(7,931)
=======
</TABLE>
(l) Represents the elimination of $7,931 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $12,521 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $4,881 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through May 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 Fund 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 $50,758 as a
result of adjusting the historical basis of the real estate wholly
owned by the Income Fund to fair value as a result of accounting
for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings is
being depreciated using the straight-line method over the remaining
useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $12,341 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 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.
(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.
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................ $ (1,773,406)
Secured equipment lease fees............................ (54,998)
Advisory fees........................................... (305,030)
Reimbursement of administrative costs................... (408,762)
Acquisition fees........................................ (21,794,386)
Underwriting fees....................................... (388,491)
Administrative, executive and guarantee fees............ (1,233,043)
Servicing fees.......................................... (1,570,331)
Development fees........................................ (229,153)
Management fees......................................... (1,851,004)
------------
Total................................................. $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the year ended
December 31, 1998, which were deferred for pro forma purposes as
described in 5(II)(c). These deferred loan origination fees are
being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income............................................... $207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs......................... $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees.......................................... $(1,851,004)
Administrative executive and guarantee fees.............. (1,233,043)
Servicing fees........................................... (1,269,357)
Advisory fees............................................ (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(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.
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4)
<TABLE>
<S> <C>
Amortization of goodwill................................... $2,160,481
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $12,979 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................. $ 0
Reimbursement of administrative costs....................... (27,846)
--------
$(27,846)
========
</TABLE>
(l) Represents the elimination of $27,846 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $33,301 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $7,358 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1998 through 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 Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
(p) Represents an increase in depreciation expense of $203,030 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Income Fund through joint venture or tenancy in
common arrangements with affiliates or unrelated third parties, to
fair value as a result by the Income Fund to fair value as a result
of accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $49,365 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(r) 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 from the pro forma statement of cash flows.
(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.
F-40
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Concluded)
(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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non-Cash Investing Activites:
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B)
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the use of amounts borrowed under APF's credit facility
and the use of cash to 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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
F-41
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund II, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund II, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
A-1
<PAGE>
(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
A-2
<PAGE>
Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
A-3
<PAGE>
Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among CNL American Properties Fund, Inc., a
Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware limited
partnership (the "Operating Partnership"), CNL APF GP Corp., a Delaware
corporation (the "OP General Partner"), CNL Income Fund II, Ltd., a Florida
limited partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr.,
and CNL Realty Corporation, a Florida corporation (together with Messrs. Bourne
and Seneff, the "General Partners"). APF, the Operating Partnership, the OP
General Partner, the Fund and the General Partners are referred to collectively
herein as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund will
be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. AMENDMENTS TO MERGER AGREEMENT
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against
the Merger and affirmatively elect the note option, such limited partners
shall be entitled to receive, in lieu of the Share Consideration, notes
(the "Notes") in the aggregate amount equal to 97% of the value (based on
the Exchange Value as defined in the Registration Statement) of the Share
Consideration such Dissenting Partners would have otherwise received had
such partners not elected to receive the Notes (the "Note Option"). The
Notes will mature on the fifth anniversary of the Closing Date and will
bear interest at a fixed rate equal to seven percent. The aggregate Share
Consideration shall be reduced on a one-for-basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners
not elected the Note Option."
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
B-1
<PAGE>
1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to Dissenting
Limited Partners shall not have exceeded 15% of the value of the Share
Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. GENERAL
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will constitute
one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or interpretation
of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any choice or
conflict of law provision or rules (whether of the State of Florida or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
B-2
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
By: ____________________________
James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
By: ____________________________
Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
By: ____________________________
Robert A. Bourne
Its: President
CNL INCOME FUND II, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
By: ____________________________
James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
By: ____________________________
James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
_________________________________
Robert A. Bourne, as General
Partner
/s/ James M. Seneff, Jr.
_________________________________
James M. Seneff, Jr., as General
Partner
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund II, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
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"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 2,393,267 fully paid and nonassessable APF Common
Shares (1,196,634 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $21,809,611, based on Valuation Associations'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 58,606,733 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to execute and
deliver this Agreement and to perform their obligations hereunder. The
execution, delivery and
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performance by APF, the OP General Partner and the Operating Partnership of
this Agreement have been duly and validly authorized by the boards of directors
of APF and the OP General Partner. This Agreement constitutes the valid and
legally binding obligation of APF, the OP General Partner and the Operating
Partnership, enforceable in accordance with its terms and conditions. None of
APF, the OP General Partner or the Operating Partnership needs to give any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order to consummate the
transactions contemplated by this Agreement, except in connection with federal
securities laws and any applicable "Blue Sky" or state securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions the validity of this
Agreement or any action to be taken by APF in connection with the consummation
of the
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transactions contemplated hereby or could otherwise prevent or delay the
consummation of the transactions contemplated by this Agreement. Except as
publicly disclosed by APF in any APF SEC Document, none of APF or its
Subsidiaries is subject to any outstanding order, writ, injunction or decree
which, insofar as can be reasonably foreseen in the future, could reasonably be
expected to have a Material Adverse Effect on APF or would prevent or delay the
consummation of the transactions contemplated hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material
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<PAGE>
terms of its permits, except where the failure so to comply could not
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF, the businesses of APF and its Subsidiaries are not,
to APF's Knowledge, being conducted in violation of any law, ordinance or
regulation of any governmental entity except that no representation or warranty
is made in this Section 6.14 with respect to environmental laws and except for
violations or possible violations which do not, and, insofar as reasonably can
be foreseen, in the future will not, have a Material Adverse Effect on APF.
Except as publicly disclosed by APF in its APF SEC Documents, no investigation
or review by any governmental entity with respect to APF or its Subsidiaries is
pending or, to the Knowledge of APF, threatened, nor, to the Knowledge of APF,
has any government entity indicated an intention to conduct the same, other
than, in each case, those which APF reasonably believes will not have a
Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 50,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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<PAGE>
will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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<PAGE>
(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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<PAGE>
from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such leases and subleases (as amended to date). With respect to
each lease and sublease listed in Section 7.12(b) of the Disclosure Schedule:
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(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General Partners have
made available to APF and the Operating Partnership correct and complete copies
of all such licenses, sublicenses, agreements, and permissions (as amended to
date).
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<PAGE>
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is
in good operating condition and repair (subject to normal wear and tear), and
is suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a
party:
(a) any agreement (or group of related agreements) for the lease of
personal property to or from any Person providing for lease payments in excess
of $25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates
(other than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any
of the General Partners or the corporate General Partner's directors,
officers, and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and
effect on identical terms following the consummation of the transactions
contemplated hereby (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (C) no party is in breach or
default, and no event has occurred which with notice or lapse of time would
constitute a breach or default, or permit termination, modification, or
acceleration, under the agreement; and (D) no party has repudiated any
provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of
the Fund are reflected properly on its books and records, are valid
receivables subject to no setoffs or counterclaims, and are current and
collectible in accordance with their terms at their recorded amounts, subject
only to the reserve for bad debts set forth on the face of the Most Recent
Balance Sheet (rather than in any notes thereto) as adjusted for the passage
of time through the Closing Date in accordance with the past custom and
practice of the Fund.
7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
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7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including policies
providing property, casualty, liability, and workers' compensation coverage and
bond and surety arrangements) to which the Fund has been a party, a named
insured, or otherwise the beneficiary of coverage at any time within the past
five years (or such lesser periods as the Fund has actively engaged in business
or owned any material assets): (i) the name, address, and telephone number of
the agent; (ii) the name of the insurer, the name of the policyholder, and the
name of each covered insured; and (iii) the policy number and the period of
coverage. With respect to each current insurance policy, to the Knowledge of
the General Partners and the Fund: (A) the policy is legal, valid, binding,
enforceable, and in full force and effect; (B) the policy will continue to be
legal, valid, binding, enforceable, and in full force and effect on identical
terms following the consummation of the transactions contemplated hereby; (C)
neither the Fund nor any other party to the policy is in breach or default
(including with respect to the payment of premiums or the giving of notices),
and no event has occurred which, with notice or the lapse of time, would
constitute such a breach or default, or permit termination, modification, or
acceleration, under the policy; and (D) no party to the policy has repudiated
any provision thereof. The Fund has been covered during the past five years (or
such lesser periods as the Fund has actively engaged in business or owned any
material assets) by insurance in scope and amount customary and reasonable for
the businesses in which it has engaged during the aforementioned period.
Section 7.18 of the Disclosure Schedule describes any self-insurance
arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the transactions
contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had any
liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do not
materially violate any such laws, ordinances, regulations or orders. The Fund
is not subject to any Liability or claim in connection with any environmental
law or any use, treatment, storage or disposal of any hazardous substance or
material or pollutant or any spill, leakage, discharge or release of any
hazardous substance or material or pollutant as a result of having owned or
operated any business prior to the Effective Time, which if a violation existed
would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $2,393,267 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $239,327 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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<PAGE>
14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
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 II, 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
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<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND III, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund III, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly-owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999, and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties on a triple-net
basis, APF has the ability to offer a complete range of restaurant property
services to operators of national and regional restaurant chains, from triple-
net leasing and mortgage financing to site selection, construction management
and build-to-suit development. If APF acquires all of the Income Funds in the
Acquisition, APF expects to have total assets of approximately $1.5 billion at
the time of the consummation of the Acquisition and will be one of the largest
triple-net lease REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 1,041,451 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is uncertain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for
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<PAGE>
trading on the NYSE. We do not know the value at which an APF Share will trade
on the NYSE upon listing. It is possible that the APF Shares will trade at
prices substantially below the exchange value. APF has, however, recently sold
$750 million of APF Shares through three public offerings. In each offering,
the offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At March 31, 1999, APF has invested all of the net offering proceeds to acquire
restaurant properties, to make mortgage loans and to pay fees and other
expenses.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the Acquisition?
There are a number of material risks and considerations that you should
consider, including:
. We are uncertain as to the value at which APF Shares will trade
following listing.
. We have material conflicts in light of our being both general
partners of the Income Funds and members of APF's Board of Directors.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. As stated below, the Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote against the
Acquisition.
Did you receive a fairness opinion in connection with APF's acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
with respect to the fairness, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
of the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the colored
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's acquisition of your
Income Fund. If you prefer, you may instead vote by telephone, following the
instructions on your consent form. If you sign and send in your consent form
and do not indicate how you want to vote, your consent form will be
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<PAGE>
counted as a vote "For" the Acquisition. If you do not vote or you abstain from
voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2004 in an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only receive the notes if you vote "Against" the
Acquisition and you elect to receive notes on your consent form. You will
receive APF Shares if your Income Fund elects to be acquired in the Acquisition
and you vote "For" the Acquisition, or you vote "Against" the Acquisition and
do not affirmatively select the notes option on your consent form. In addition,
if Limited Partners in your Income Fund elect to receive notes in an amount
greater than 15% of the estimated value of APF Shares, based on the exchange
value, to be paid to your Income Fund, then APF has the right to decline to
acquire your Income Fund. The notes will not be listed on any exchange or
automated quotation system, and a market for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
the tax that you must pay will generally be based on the difference between the
value of the APF Shares you receive and the tax basis of your units. If you
elect to receive notes, your tax will be based upon your allocable share of the
gain which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Some of
the gain may be subject to the 25% rate of tax applicable to certain types of
real property gain.
We urge you to consult with your tax advisor to evaluate the taxes that will be
incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $675. To review
the tax consequences to the Limited Partners of the Income Funds in greater
detail, see pages 180 through 194 of the consent solicitation and "Federal
Income Tax Considerations" in this supplement.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds acquired by
APF may be differently constructed, located in a different geographic area or
of a different restaurant chain than the restaurant properties owned by your
Income Fund. Because the market for real estate may vary from one region of the
country to another, the change in geographic diversity may expose you to
different and greater risks than those to which you are presently exposed. For
geographic information regarding APF's and the Income Funds' restaurant
properties, see "APF's Business and The Restaurant Properties--Business
Objectives and Strategies" and "--The Restaurant Properties--General" and
"Business of the Income Funds--Description of Restaurant Properties" in the
consent solicitation.
S-3
<PAGE>
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund. This description is qualified in its entirety
by the more detailed discussion in the section entitled "Risk Factors"
contained in the consent solicitation.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease below the exchange value upon listing.
Your Income Fund will be receiving 1,041,451 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices substantially below
the exchange value or the historical per share book value of the assets of APF.
The APF Shares have been approved for listing on the NYSE, subject to official
notice of issuance. Prior to listing, the existing APF stockholders have not
had an active trading market in which they could sell their APF Shares.
Additionally, any Limited Partners of the Income Funds who become APF
stockholders as a result of the Acquisition, will have transformed their
investment in non-tradable units into an investment in freely tradable APF
Shares. Consequently, some of these stockholders may choose to sell their APF
Shares upon listing at a time when demand for APF Shares may be relatively low.
The market price of the APF Shares may be volatile after the Acquisition, and
the APF Shares could trade at prices substantially less than the exchange value
as a result of increased selling activity following the issuance of the APF
Shares, the interest level of investors in purchasing the APF Shares after the
Acquisition and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund made $950, $950 and $1,391, respectively, in distributions per $10,000
investment to you. The amount distributed to you in 1998 included a special
distribution of net sales proceeds of $159 per $10,000 investment. While
historically, APF has made distributions equal to 7.625% per APF Share, based
on the exchange value, we cannot be sure that APF will be able to maintain this
level of distributions in the future. In the event that APF is unable to
maintain this level of distributions, your distributions per $10,000 investment
may decrease substantially after the Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have two material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne have a different interest in the completion of the Acquisition which
may conflict with your interest as a Limited Partner of the Income Fund or with
their own positions as the general partners of your Income Fund. Second, while
we will not receive any APF Shares as a result of APF's Acquisition of your
Income Fund, we, as the general partners of your Income Fund, may be required
to pay all or a substantial portion of the Acquisition costs allocated to your
Income Fund to the extent that you or other Limited Partners of your Income
Fund vote against the Acquisition. For additional information regarding the
Acquisition costs allocated to your Income Fund, see "Comparison of Alternative
Effect on Financial Condition and Results of Operations" contained in this
supplement.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of
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<PAGE>
restaurant properties in which you participate in the profits from the
operation of its restaurant properties, to holding common stock of APF, an
operating company, that will own and lease on a triple-net basis, on the date
that the Acquisition is consummated, assuming only your Income Fund was
acquired as of March 31, 1999, 541 restaurant properties. The risks inherent in
investing in an operating company such as APF include that APF may invest in
new restaurant properties that are not as profitable as APF anticipated, may
incur substantial indebtedness to make future acquisitions of restaurant
properties which it may be unable to repay and may make mortgage loans to
prospective operators of national and regional restaurant chains which may not
have the ability to repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through sale of your APF Shares, not from
liquidation proceeds from restaurant properties. Continuation of your Income
Fund would, on the other hand, permit you eventually to receive liquidation
proceeds, if any, from the sale of the Income Fund's restaurant properties, and
your share of these sale proceeds could be higher than the amount realized from
the sale of your APF Shares or from the payments on any notes if you elect to
receive notes.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default 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. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
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mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to Fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
March 31, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.62x and its ratio of debt-to-total assets was
28.03%. If only your Income Fund is acquired as of that date, APF's debt
service ratio would have been 3.70x and its ratio of debt-to-total assets would
have been 27.48%. Up through the time immediately prior to the consummation of
the Acquisition, as a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former limited partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgages. APF
typically does not require that a third party guarantee the obligations of the
tenant or the borrower. The ability of the tenants or borrowers to pay their
obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their
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businesses. Various factors, many of which are beyond the control of a
restaurant chain, may adversely affect the economic viability of the restaurant
chain, including but not limited to: (1) national, regional and local economic
conditions which may be adversely affected by industry slowdowns, employer
relocations, prevailing employment conditions and other factors, and which may
reduce consumer demand for the products offered by APF's customers; (2) local
real estate conditions; (3) changes or weaknesses in specific industry
segments; (4) perceptions by prospective customers of the safety, convenience,
services and attractiveness of the restaurant chain; (5) changes in
demographics, consumer tastes and traffic patterns; (6) the ability to obtain
and retain capable management; (7) changes in laws, building codes, similar
ordinances and other legal requirements, including laws increasing the
potential liability for environmental conditions existing on properties; (8)
the inability of a particular restaurant chain's computer system, or that of
its franchisor or vendors, to adequately address Year 2000 issues; (9)
increases in operating expenses; and (10) increases in minimum wages, taxes,
including income, service, real estate and other taxes, or mandatory employee
benefits.
APF has tenants of two significant restaurant chains that have filed for
bankruptcy protection.
The fact that APF has tenants of two significant restaurant chains that have
filed for bankruptcy protection may adversely affect APF's total rental, earned
and interest income. Because all of APF's properties are leased on a triple-net
basis, if a tenant has defaulted on its lease obligations or has declared
bankruptcy, it would reduce APF's rental, earned and interest income until APF
could lease those affected properties to a new tenant or tenants. As of March
31, 1999, your Income Fund had no tenants under bankruptcy protection, and
therefore, assuming that your Income Fund is acquired by APF, you, as an APF
stockholder or noteholder, may be subject to the adverse consequences
associated with having tenants under bankruptcy protection.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as a stockholder, would be reduced substantially for
each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to certain adjustments that are unique to REITs, a REIT generally
must distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
For a more detailed discussion of the risks associated with the Acquisition,
see "Risk Factors" in the consent solicitation.
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<PAGE>
CONSIDERATION PAID TO INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth information regarding the estimated value of
the consideration that your Income Fund will receive in the Acquisition. The
APF Shares payable to your Income Fund will not change if APF acquires fewer
than all of the Income Funds in the Acquisition. This data assumes that none of
the Limited Partners of your Income Fund have elected to receive notes. You
should note that the APF Shares may trade at prices substantially below the
exchange value upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited
Partner
Original Investments
Limited Less any
Partner Distributions Estimated Value
Investments of Net Sales Number of Estimated of APF Shares
Less any Proceeds per APF Value of APF Estimated Value per Average
Distributions $10,000 Shares Shares Estimated of APF Shares $10,000 Original
of Net Sales Original Offered to Payable to Acquisition after Acquisition Limited Partner
Proceeds(1) Investment(1) Income Fund Income Fund Expenses Expenses Investment
- ------------- ------------- ----------- ------------ ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$22,253,502 $8,901 1,041,451 $20,829,020 $266,000 $20,563,020 $8,225
</TABLE>
- --------
(1) The original Limited Partner investment in the Income Fund was $25,000,000.
These columns reflect, as of March 31, 1999, an adjustment to the Limited
Partners original investments based on distributions of net sales proceeds
received from sales of restaurant properties (both as a special
distribution and those that were added to working capital and subsequently
distributed).
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2004. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2004. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest. For more detailed information, see "The Acquisition" and
"Description of the Notes" in the consent solicitation.
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
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The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1)...................................................... $ 11,794
Appraisals and Valuation(2)........................................ 4,950
Fairness Opinions(3)............................................... 30,000
Solicitation Fees(4)............................................... 11,160
Printing and Mailing(5)............................................ 73,276
Accounting and Other Fees(6)....................................... 24,753
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Subtotal......................................................... 155,933
========
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(7).......................... 50,426
Legal Closing Fees(8).............................................. 24,908
Partnership Liquidation Costs(9)................................... 34,733
--------
Subtotal......................................................... 110,067
--------
Total.............................................................. $266,000
========
</TABLE>
--------
(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $312,063. Your
Income Fund's pro-rata portion of these fees was determined based
on the percentage of the value of the APF Share consideration
payable to your Income Fund, based on the exchange value, to the
total value of the APF Share consideration payable to all of the
Income Funds, based on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the
Income Funds in connection with the Acquisition were $105,420. Your
Income Fund's pro-rata portion of these fees was determined based
on number of restaurant properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and
incurred a fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $249,626. Your
Income Fund's pro-rata portion of these fees was determined based
on the number of Limited Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to be
$1,610,399. Your Income Fund's pro-rata portion of these fees was
determined based on the number of Limited Partners in your Income
Fund.
(6) Aggregate accounting and other fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to be
$683,904. Your Income Fund's pro-rata portion of these fees was
determined based on the percentage of your Income Fund's total
assets as of March 31, 1999 to the total assets of all of the
Income Funds as of March 31, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by
all of the Income Funds in connection with the Acquisition is
estimated to be $1,312,808. Your Income Fund's pro-rata portion of
these fees was determined based on the percentage of the value of
the APF Share consideration payable to your Income Fund, based on
the exchange value, to the total value of the APF Share
consideration payable to all of the Income Funds, based on the
exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,454. Your
Income Fund's pro-rata portion of these fees was determined based
on the percentage of your Income Fund's total assets as of March
31, 1999 to the total assets of all of the Income Funds as of March
31, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of
the Income Funds in connection with the Acquisition is estimated to
be $895,326. Your Income Fund's pro-rata portion of these costs was
determined based on the percentage of the value of the APF Share
consideration payable to your Income Fund, based on the exchange
value, to the total value of the APF Share consideration payable to
all of the Income Funds, based on the exchange value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
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related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 66 2/3% or more in value of your Income Fund's
restaurant properties. Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding units.
Consequence of Failure to Approve the Acquisition
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition, the Acquisition may
not be consummated under the terms of the partnership agreement. In such event,
we plan to continue to operate your Income Fund as a going concern and to
eventually dispose of your Income Fund's restaurant properties approximately 7
to 15 years after they were acquired or as soon thereafter if, in our opinion,
market conditions permit, as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at . We and
members of APF's management intend to solicit actively your support for the
Acquisition and would like to use the special meeting to answer questions about
the Acquisition and the solicitation materials and to explain in person our
reasons for recommending that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain their votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
S-10
<PAGE>
If you are not planning on attending the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about ,
1999 and will continue until the later of (a) , 1999, a date not less than
60 calendar days from the initial delivery of the solicitation materials, or
(b) such later date as we may select and as to which we give you notice. At our
discretion, we may elect to extend the solicitation period. Under no
circumstances will the solicitation period be extended beyond March 31, 2000.
Any consent form received by Corporate Election Services prior to 5:00 p.m.,
Eastern time, on the last day of the solicitation period will be effective
provided that such consent form has been properly completed and signed. If you
fail to return a signed consent form by the end of the solicitation period,
your units will be counted as voting "Against" the Acquisition of your Income
Fund and you will receive APF Shares if your Income Fund is acquired. If you
prefer, you may instead vote by telephone according to the instructions on your
consent form.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the quarter
ended March 31, 1999, the aggregate amounts accrued or paid by your Income Fund
to us are shown below under "Historical Distributions paid to the General
Partners and Affiliates" and the estimated amounts of compensation that
S-11
<PAGE>
would have been paid had the Acquisition been in effect for the periods
presented, are shown below under "Pro Forma Distributions to be paid to the
General Partners following the Acquisition":
<TABLE>
<CAPTION>
Quarter
Ended
Year Ended December 31, March
------------------------- 31,
1996 1997 1998 1999
------- -------- -------- -------
<S> <C> <C> <C> <C>
Historical Distributions paid to the General
Partners and Affiliates:
General Partner Distributions............. -- -- -- --
Accounting and Administrative Services.... $85,906 $87,056 $89,756 $24,016
Broker/Dealer Commissions................. -- -- -- --
Due Diligence and Marketing Support Fees.. -- -- -- --
Acquisition Fees.......................... -- -- -- --
Asset Management Fees..................... -- -- -- --
Real Estate Disposition Fees(1)........... -- 15,150 53,400 --
------- -------- -------- -------
Total historical........................ $85,906 $102,206 $143,156 $24,016
Pro Forma Distributions to be paid to the
General Partners following the Acquisition:
Cash Distributions on APF Shares.......... -- -- -- --
Salary Compensation....................... -- -- -- --
------- -------- -------- -------
Total pro forma......................... -- -- -- --
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to certain minimum
returns to the Limited Partners. To date, no such fees have been paid since
the required minimum returns have not been made to the Limited Partners.
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
contained herein under the caption "Financial Statements" and in the consent
solicitation under the caption "Summary--Our Reasons for Supporting the
Acquisition--Prices for Income Fund Units."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31, 1999
-------------------------- --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income..... $736 $587 $719 $949 $ 689 $132 $104
Distributions from Sales of
Properties................... -- -- -- -- 591 -- --
Distributions from Return of
Capital(1)................... 214 363 231 1 111 68 74
---- ---- ---- ---- ------ ---- ----
Total....................... $950 $950 $950 $950 $1,391 $200 $178
==== ==== ==== ==== ====== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from certain non-cash
items. This amount is not required to be presented as a return of capital
except for purposes of this table, and the Income Fund has not treated this
amount as a return of capital for any other purpose.
S-12
<PAGE>
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses during 1999. Thus, the pro forma information regarding
the distributions to APF stockholders for the quarter ended March 31, 1999 is
not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the Acquisition
with those of several alternatives, the Acquisition is more economically
attractive to you and the other Limited Partners than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to certain closing conditions. Second, if your Income Fund is acquired
all Limited Partners of your Income Fund who vote against the Acquisition will
be given the option of receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others, that we will be relieved
from certain ongoing liabilities with respect to the Income Fund if it is
acquired by APF. For a further discussion of the conflicts of interest and
potential benefits of the Acquisition to us, see "Conflicts of Interest" below.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the values of the
consideration which would have been received by you and the other Limited
Partners in alternative transactions and concluded that the Acquisition is fair
based on such comparison. In addition, we believe the Acquisition is the best
way to maximize the return on your investment because of your ability to
participate in the potential appreciation of APF Shares. Since the
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<PAGE>
investment in your Income Fund is an investment in a static portfolio due to
the restrictions contained in your Income Fund's partnership agreement and
limited capital resources, your investments have little or no opportunity to
appreciate. Because APF is a growth-oriented operating company, you will have
the opportunity, as an APF stockholder, to participate in APF's future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinions of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinions of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., an affiliate of CNL Group, Inc., and (3) Valuation
Associates has previously performed valuation appraisals for APF. See "Reports,
Opinions and Appraisals" in the consent solicitation.
On rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Funds, Legg
Mason did not address or render any opinion with respect to, any other aspect
of the Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition or
the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
.the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
.any other matters with respect to any specific individual partner or class
of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Legg Mason's opinion also does not compare the relative merits of the
Acquisition with those of any other transaction or business strategy which were
or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares will exceed the going concern value and
liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will
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<PAGE>
vary, however, from Income Fund to Income Fund. In addition to the receipt of
cash available for distribution, you and the other Limited Partners will be
able to benefit from the potential growth of APF as an operating company and
will also receive investment liquidity through the public market in APF Shares.
5. Net Book Value of the Income Fund. We calculated the book value of your
Income Fund under generally accepted accounting principles, or GAAP, as of
March 31, 1999 per average $10,000 original investment. Since the calculation
of the book value was done on a GAAP basis, it is primarily based on historical
cost and, therefore, it is not indicative of the true fair market value of your
Income Fund. This figure was compared to three other figures:
(1) the value of the Income Fund if it commenced an orderly liquidation of
its investment portfolio on December 31, 1998,
(2) the value of the Income Fund if it continued to operate in accordance
with its existing partnership agreement and business plans, and
(3) the estimated value of the APF Shares, based on the exchange value,
paid to each Income Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated
Original Value of APF
Limited Partner Shares per
Investments Less Going Average $10,000
any Distributions GAAP Book Liquidation Concern Original Limited
of Sales Proceeds(1) Value Value(2) Value(2) Partners Investment
-------------------- --------- ----------- -------- -------------------
<S> <C> <C> <C> <C> <C>
CNL Income Fund III, Ltd.. $8,901 $6,281 $7,648 $8,214 $8,225
</TABLE>
- --------
(1) This column reflects, as of December 31, 1998, an adjustment to the Limited
Partners' original average $10,000 investment based on distributions of net
sales proceeds received from sales of restaurant properties (both as a
special distribution and those that were added to working capital and
subsequently distributed).
(2) Liquidation and going concern values were based on appraisals prepared by
Valuation Associates. For a complete description of the methodologies
employed by Valuation Associates, see "Reports, Opinions and Appraisals" in
the consent solicitation.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have contractual
obligations pursuant to your Income Fund's partnership agreement as well as
state law to assess whether the terms of the Acquisition are fair and equitable
to the Limited Partners of your Income Fund without regard to whether the
Acquisition is fair and equitable to any of the other participants, including
the Limited Partners in other Income Funds. James M. Seneff, Jr. and Robert A.
Bourne act as the individual general partners of all of the Income Funds and
also as members of the Board of Directors of APF. While Messrs. Seneff and
Bourne have sought faithfully to discharge their obligations to your Income
Fund, there is an inherent conflict of interest in serving, directly or
indirectly, in a similar capacity with respect to your Income Fund and also on
APF's Board of Directors.
Lack of Independent Representation
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and
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<PAGE>
conditions of the Acquisition or to determine what procedures should be used to
protect the rights and interests of the Limited Partners. In addition, no
investment banker, attorney, financial consultant or expert was engaged to
represent the interests of the Limited Partners. We have been the parties
responsible for structuring all the terms and conditions of the Acquisition.
Legal counsel engaged to assist with the preparation of the documentation for
the Acquisition, including this consent solicitation, was engaged by us and did
not serve, or purport to serve, as legal counsel for the Income Funds or
Limited Partners. If an independent representative had been retained for the
Income Funds, the terms of the Acquisition may have been different and possibly
more favorable to the Limited Partners. In particular, had separate
representation for each of the Income Funds been arranged by us, issues unique
to the value of each of the specific Income Funds might have been highlighted
or received greater attention, resulting in adjustments to the value assigned
to the assets of such Income Funds and increasing the number of APF Shares or
notes that would be allocable to such Income Fund if acquired in the
Acquisition.
Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive two material benefits. These benefits include:
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr. Seneff
serving as Chairman of APF and Mr. Bourne serving as Vice Chairman.
Furthermore, they will be entitled to receive performance-based
incentives, including stock options, under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of the Income Funds, we are legally liable for all of
Income Funds liabilities to the extent that the Income Funds are unable
to satisfy such liabilities. Because the partnership agreement for each
Income Fund prohibits the Income Funds from incurring indebtedness, the
only liabilities the Income Funds have are liabilities with respect to
their ongoing business operations. In the event that one or more Income
Funds are acquired by APF, we would be relieved of our legal obligation
to satisfy the liabilities of the acquired Income Fund or Income Funds.
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Certain Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund. If
your Income Fund is acquired by APF, and you have voted "For" the Acquisition,
you will receive APF Shares. If you have voted "Against" the Acquisition but
your Income Fund is acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
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<PAGE>
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under certain circumstances, even
if APF were to make the same level of distributions as your Income Fund, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you. For certain other differences attributable to APF's status as a REIT,
see "--Taxation of APF" and "--Taxation of Stockholders--Taxable Domestic
Stockholders" in the consent solicitation.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes if
your Income Fund is acquired by APF, the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain and loss based on the
exchange value, for an average $10,000 original Limited Partner investment in
your Income Fund, is set forth in the table below for those Limited Partners
subject to federal income taxation.
<TABLE>
<CAPTION>
Estimated Gain/(Loss) per
Average $10,000 Original
Limited Partner Investment(1)
-----------------------------
<S> <C>
CNL Income Fund III, Ltd. ....................... $675
</TABLE>
- --------
(1) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be significantly below the exchange value.
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one more individuals or entities in exchange for the stock of that corporation,
and (2) immediately after the exchange, such individuals or entities are in
control of the corporation. For purposes of section 351(a), control is defined
as the ownership of stock possessing at least 80 percent of the total combined
voting power of all classes of stock entitled to vote and at least 80 percent
of the total number of shares of all other classes of stock of the corporation.
APF has represented to Shaw Pittman, APF's tax counsel, that, following the
Acquisition, the Limited Partners of the Income Funds will not own stock
possessing at least 80 percent of the total combined voting power of all
classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if
any, assumed by the Operating Partnership, and
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<PAGE>
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2004, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses that
you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the notes may recognize gain in the year of the
Acquisition despite the fact that they will not receive cash with which to pay
the tax on the gain. Such Limited Partners will adjust the basis of the notes
as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes. See "--Tax Consequences of Liquidation and
Termination of Your Income Fund" below.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition, including gain or loss resulting from the
S-18
<PAGE>
Acquisition. If your taxable year is not the calendar year, you could be
required to recognize as income in a single taxable year your share of your
Income Fund's income attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units. Your holding period for
the notes for purposes of determining capital gain or loss from the disposition
of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17) or
(20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
For a discussion of the taxation of APF, see "Federal Income Tax
Considerations--Taxation of APF" in the consent solicitation.
S-19
<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 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 2,307,364 1,391,466 8,137 (2,450,663)(b),(c)
Interest and
Other Income..... 2,214,763 0 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 0 1,095,269 2,563,714 1,323,577 64,186 (377,734)(e)
Management and
Advisory Fees.... 697,364 0 697,364 0 0 611,196 (1,308,560)(f)
Fees to Related
Parties.......... 0 0 0 23,326 292,575 0 (292,786)(g)
Interest
Expense.......... 0 0 0 50,730 0 4,769,268 0
State Taxes...... 235,208 0 235,208 0 0 0 0
Depreciation--
Other............ 0 0 0 39,581 26,238 0 0
Depreciation--
Property......... 1,548,813 349,465(a) 1,898,278 0 0 0 0
Amortization..... 7,368 0 7,368 0 0 0 541,044 (h)
Transaction
Costs............ 125,926 0 125,926 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
Total Expenses.. 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650 (1,438,036)
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) $ (950,559)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 0 17,271 0 0 0 0
Gain on Sale of
Properties....... 0 0 0 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 (215,797) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
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) (950,559)
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) $(1,199,238)
=========== ========== =========== ========== ========== ========== ===========
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund III, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ----------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $14,523,161 $ 429,827A $ 584 (j) $14,953,572
Fees............. 1,256,304 0 ( 13,593)(k) 1,242,711
Interest and
Other Income..... 7,687,325 16,470 0 7,703,795
------------ ----------- ------------------ ------------
Total Revenue... $23,466,790 $446,297 $ (13,009) $23,900,078
Expenses:
General and
Administrative... 4,669,012 38,010 ( 23,353)(l),(m) 4,683,669
Management and
Advisory Fees.... 0 0 0(n) 0
Fees to Related
Parties.......... 23,115 0 0 23,115
Interest
Expense.......... 4,819,998 0 0 4,819,998
State Taxes...... 235,208 12,617 4,248 (o) 252,073
Depreciation--
Other............ 65,819 0 0 65,819
Depreciation--
Property......... 1,898,278 69,280 36,556 (p) 2,004,114
Amortization..... 548,512 0 0 548,412
Transaction
Costs............ 125,926 30,882 0 156,808
------------ ----------- ------------------ ------------
Total Expenses.. 12,385,768 150,789 17,451 12,554,008
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties, and
Provision for
Losses on
Properties....... $11,081,022 $ 295,508 $ (30,460) $11,346,070
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 37,114 (7,619)(q) 46,766
Gain on Sale of
Properties....... 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 0 (215,797)
------------ ----------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/
(Provision) for
Federal Income
Taxes............ 10,882,496 332,622 (38,079) 11,177,039
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ----------- ------------------ ------------
Net
Earnings(Losses).. $10,882,496 $ 332,662 $ (38,079) $11,177,039
============ =========== ================== ============
</TABLE>
S-20
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
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
============ =========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 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
============ =========== ============ ========== ========== ============ ===========
Weighted average
units
outstanding
during period... n/a n/a n/a n/a n/a n/a n/a
============ =========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,401 n/a 37,347,401 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 n/a 37,348,464 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... 14,237,405 n/a n/a n/a n/a n/a n/a
Cash
distributions
declared per
$10,000
Investment...... 191 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)
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 $31,188,972 (v1),(w)
Total
liabilities/minority
interest........ $ 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 $31,609,342 (v1),(x)
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund III, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- ------------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 542 28 n/a 570
============== =========== ==================== ==================
Earnings per
share/unit...... $ n/a 6.65 $ n/a $ .25
============== =========== ==================== ==================
Book value per
share/unit...... $ n/a $ 314.06 $ n/a $ 16.36
============== =========== ==================== ==================
Dividends per
share/unit...... $ n/a $ 10 $ n/a $ n/a
============== =========== ==================== ==================
Ratio of
earnings to
Fixed Charges... n/a n/a n/a 3.19x
============== =========== ==================== ==================
Weighted average
units
outstanding
during period... n/a 50,000 n/a n/a
============== =========== ==================== ==================
Weighted average
shares
outstanding
during period... 43,497,401 n/a 1,028,151 44,525,552 (r)
============== =========== ==================== ==================
Shares
outstanding..... 43,498,464 n/a 1,028,151 44,526,615
============== =========== ==================== ==================
Cash
distributions
declared:....... n/a 500,000 n/a $ 19,315,053 (s)
==================
Cash
distributions
declared per
$10,000
Investment...... n/a 50 n/a $ 217 (t)
==================
Balance sheet
data:
Real estate
assets, net..... $ 647,547,023 $13,171,404 $5,950,283 (v2) $ 666,668,710
Mortgages/notes
receivable...... $ 289,166,027 $ -- $ -- $ 289,166,027
Receivables,
net............. $ 14,969,032 $ 64,657 $ (141,182)(y) $ 14,892,507
Investment
in/due from
joint ventures.. $ 1,083,564 $ 2,153,198 $ 838,295(v2) $ 4,075,057
Total assets.... $1,052,772,294 $16,545,988 $4,718,936 (v2),(y) $1,074,037,218
Total
liabilities/minority
interest........ 346,929,801 $ 843,094 $ (141,182)(y) $ 347,631,713
Total equity.... $ 705,842,493 $15,702,894 $4,860,118 (v2) $ 726,405,505
</TABLE>
S-21
<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
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<CAPTION>
<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 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
</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>
<CAPTION>
<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>
(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)
<TABLE>
<S> <C>
Amortization of goodwill $541,044
</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 $584 in accrued rental income resulting from the straight-
lining of scheduled rent increases throughout the lease terms for the
leases acquired from the Income Fund as if the leases had been acquired
on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<CAPTION>
<S> <C>
Management fees $ 0
Reimbursement of administrative costs (13,593)
--------
$(13,593)
========
</TABLE>
S-22
<PAGE>
(l) Represents the elimination of $13,593 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $9,760 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports
for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income Fund
to the Advisor.
(o) Represents additional state income taxes of $4,248 resulting from
assuming that acquisitions of properties that had been operational when
APF acquired them from January 1, 1999 through May 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 Fund 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 $36,556 as a result
of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated using
the straight-line method over the remaining useful lives of the
properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $7,619
as a result of adjusting the historical basis of the real estate owned
by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings owned indirectly by the
Income Fund is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(r) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 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 Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Income Fund Total
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Shares Offered 3,800,000 2,350,000 1,028,150.6 7,178,150.6
Exchange Value $20 $20 $20 $20
----------- ----------- ----------- ------------
Share Consideration $76,000,000 $47,000,000 $20,563,012 $143,563,012
Cash Consideration -- -- 266,000 266,000
APF Transaction Costs 5,655,521 3,497,493 1,549,986 10,703,000
----------- ----------- ----------- ------------
Total Purchase Price $81,655,521 $50,497,493 $22,378,998 $154,532,012
=========== =========== =========== ============
Allocation of Purchase
Price:
----------------------
Net Assets --
Historical $ 7,141,252 $10,006,878 $15,702,894 $ 32,851,024
Purchase Price
Adjustments:
Land and buildings on
operating leases 4,740,703 4,740,703
Net investment in
direct financing
leases 1,209,580 1,209,580
Investment in joint
ventures 838,295 838,295
Accrued rental income (75,172) (75,172)
Intangibles and other
assets (2,792,876) (37,302) (2,830,178)
Goodwill* 43,283,491 -- 43,283,491
Excess purchase price 74,514,269 -- -- 74,514,269
----------- ----------- ----------- ------------
Total Allocation $81,655,521 $50,497,493 $22,378,998 $154,532,012
=========== =========== =========== ============
</TABLE>
--------
* Goodwill represents the portion of the purchase price which is
assumed to relate to the ongoing value of the debt business.
S-23
<PAGE>
The APF Transaction costs of $10,703,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $74,514,269 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 43,283,491 relating to the
acquisition of the CNL Financial Services Group is being amortized over 20
years. APF did not acquire any intangibles as part of any of the
acquisitions. The entries were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC)--Class A 8,600
Common Stock (CFA, CFS, CFC)--Class B 4,825
APIC (CFA, CFS, CFC) 13,857,645
Retained Earnings 3,277,060
Accumulated distributions in excess of earnings 74,514,269
Goodwill for CFC (Intangibles and other assets) 43,283,491
CFC/CFS Org Costs/Other Assets 2,792,876
Cash to pay APF transaction costs 9,153,014
APF Common Stock 61,500
APF APIC 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital 15,702,894
Land and buildings on operating leases 4,740,703
Net investment in direct financing leases 1,209,580
Investment in joint ventures 838,295
Accrued rental income 75,172
Intangibles and other assets 37,302
Cash to pay APF Transaction costs 1,549,986
Cash consideration to Income Funds 266,000
APF Common Stock 10,282
APF APIC 20,552,730
(To record acquisition of Income Fund)
</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 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.
(y)Represents the elimination by the Income Fund of $141,182 in related
party payables recorded as receivables by the Advisor.
S-24
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND III, LTD.
The following table sets forth certain financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
III, Ltd." in this supplement.
<TABLE>
<CAPTION>
Quarter Ended
March 31, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 483,411 $ 527,412 $ 1,786,254 $ 2,023,495 $ 2,452,797 $ 2,358,235 $ 2,511,833
Net income (2).......... 332,622 978,233 1,736,883 2,391,835 1,814,657 1,482,515 1,858,605
Cash distributions
declared (3)........... 500,000 1,977,747 3,477,747 2,376,000 2,376,000 2,376,000 2,376,000
Net income per unit
(2).................... 6.59 19.39 34.44 47.47 35.93 29.37 36.80
Cash distributions
declared per unit (3).. 10.00 39.55 69.55 47.52 47.52 47.52 47.52
GAAP book value per
unit................... 314.06 332.23 317.41 352.22 351.91 363.13 381.00
Weighted average number
of Limited
Partner units
outstanding............ 50,000 50,000 50,000 50,000 50,000 50,000 50,000
<CAPTION>
March 31, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $16,545,988 $18,930,315 $16,701,732 $18,479,002 $18,608,907 $19,065,305 $19,945,765
Total partners'
capital................ 15,702,894 16,611,622 15,870,272 17,611,136 17,595,301 18,156,644 19,050,129
</TABLE>
- --------
(1) Revenues include equity in earnings of the unconsolidated joint venture and
minority interest in income and losses of the consolidated joint ventures.
(2) Net income for the quarter ended March 31, 1998 and the year ended December
31, 1998, includes gain on sale of land and buildings of $583,373 and
$497,321, respectively, and for the year ended December 31, 1998, as
impairment in carrying value of net investment in direct financing lease,
of $25,821. Net income for the years ended December 31, 1997 and 1995,
includes a provision for loss on land and building of $32,819 and $207,844,
respectively. Net income for the year ended December 31, 1997, includes
gain on sale of land and buildings of $1,027,590.
(3) Distributions for the quarter ended March 31, 1998, and the year ended
December 31, 1998, include a special distribution to the Limited Partners
of $1,477,747 as a result of the distribution of net sales proceeds from
restaurant properties sales.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND III, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on June
1, 1987, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurant properties, as
well as land upon which restaurants were to be constructed, which are leased
primarily to operators of selected national and regional fast-food restaurant
chains. The leases generally are triple-net leases, with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of 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.
S-26
<PAGE>
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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<PAGE>
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
S-28
<PAGE>
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.
S-29
<PAGE>
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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<PAGE>
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.
S-31
<PAGE>
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
S-33
<PAGE>
$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.
S-34
<PAGE>
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
S-35
<PAGE>
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.
S-36
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998...... F-1
Condensed Statements of Income for the Quarters Ended March 31, 1999
and 1998................................................................ F-2
Condensed Statements of Partner's Capital for the Quarter Ended March 31,
1999 and for the Year Ended December 31, 1998........................... F-3
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998................................................................ F-4
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998........................................................... F-5
Report of Independent Accountants........................................ F-7
Balance Sheets as of December 31, 1998 and 1997.......................... F-8
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-9
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-10
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-12
Unaudited Pro Forma Financial Information................................ F-23
Unaudited Pro Forma Balance Sheet as of March 31, 1999................... F-24
Unaudited Pro Forma Statement of Earnings for the Quarter Ended March 31,
1999.................................................................... F-26
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998.................................................................... F-28
Unaudited Pro Forma Statement of Cash Flows for the Quarter Ended
March 31, 1999.......................................................... F-30
Unaudited Pro Forma Statement of Cash Flows for the Year Ended
December 31, 1998....................................................... F-32
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements.............................................................. F-34
</TABLE>
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December
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-1
<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-2
<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-3
<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-4
<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-5
<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. 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-6
<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-7
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building..................................... $11,418,836 $14,635,583
Net investment in direct financing leases, less
allowance for impairment in carrying value............ 887,071 926,862
Investment in joint ventures........................... 2,157,147 1,179,762
Mortgage note receivable............................... -- 681,687
Cash and cash equivalents.............................. 2,047,140 493,118
Restricted cash........................................ -- 251,879
Receivables, less allowance for doubtful accounts of
$153,598 and $154,469................................. 89,519 102,420
Prepaid expenses....................................... 6,751 14,361
Lease costs, less accumulated amortization of $12,000
and $2,762............................................ -- 9,238
Accrued rental income, less allowance for doubtful
accounts of $41,380 and $15,384....................... 65,914 154,738
Other assets........................................... 29,354 29,354
----------- -----------
$16,701,732 $18,479,002
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 2,072 $ 5,219
Accrued and escrowed real estate taxes payable......... 15,217 11,897
Distributions payable.................................. 500,000 594,000
Due to related parties................................. 152,887 97,388
Rents paid in advance and deposits..................... 25,579 20,745
----------- -----------
Total Liabilities.................................... 695,755 729,249
Minority interest...................................... 135,705 138,617
Partners' capital...................................... 15,870,272 17,611,136
----------- -----------
$16,701,732 $18,479,002
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $1,523,980 $1,859,911 $2,184,460
Adjustments to accrued rental income.... (103,830) -- --
Earned income from direct financing
leases................................. 134,702 70,575 89,390
Contingent rental income................ 98,915 157,648 157,993
Interest and other income............... 127,064 100,816 26,496
---------- ---------- ----------
1,780,831 2,188,950 2,458,339
---------- ---------- ----------
Expenses:
General operating and administrative.... 137,245 140,886 147,840
Professional services................... 36,591 27,314 50,064
Bad debt expense........................ -- 32,360 924
Real estate taxes....................... 11,966 47,165 1,973
State and other taxes................... 12,249 9,924 11,973
Depreciation and amortization........... 308,593 368,782 425,366
Transaction costs....................... 14,227 -- --
---------- ---------- ----------
520,871 626,431 638,140
---------- ---------- ----------
Income Before Minority Interest in Income
of Consolidated Joint Venture, Equity in
Earnings (Loss) of Unconsolidated Joint
Ventures, Gain on Sale of Land and
Buildings and Provision for Loss on Land
and Building and Impairment in Carrying
Value of Net Investment in Direct
Financing Lease.......................... 1,259,960 1,562,519 1,820,199
Minority Interest in Income of
Consolidated Joint Venture............... (17,285) (17,285) (17,282)
Equity in Earnings (Loss) of
Unconsolidated Joint Ventures............ 22,708 (148,170) 11,740
Gain on Sale of Land and Buildings........ 497,321 1,027,590 --
Provision for Loss on Land and Building
and Impairment in Carrying Value of Net
Investment in Direct Financing Lease..... (25,821) (32,819) --
---------- ---------- ----------
Net Income................................ $1,736,883 $2,391,835 $1,814,657
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 15,027 $ 18,306 $ 18,147
Limited partners........................ 1,721,856 2,373,529 1,796,510
---------- ---------- ----------
$1,736,883 $2,391,835 $1,814,657
========== ========== ==========
Net Income Per Limited Partner Unit....... $ 34.44 $ 47.47 $ 35.93
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................ 50,000 50,000 50,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
----------------- -------------------------------------------------
Accumu- Accumu-
Contri- lated Contri- Distri- lated Syndication
butions Earnings butions butions Earnings Costs Total
-------- -------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $161,500 $141,658 $25,000,000 $(18,397,640) $14,116,024 $(2,864,898) $18,156,644
Distributions to
limited partners
($47.52 per limited
partner unit)......... -- -- -- (2,376,000) -- -- (2,376,000)
Net income............. -- 18,147 -- -- 1,796,510 -- 1,814,657
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 161,500 159,805 25,000,000 (20,773,640) 15,912,534 (2,864,898) 17,595,301
Distributions to
limited partners
($47.52 per limited
partner unit)......... -- -- -- (2,376,000) -- -- (2,376,000)
Net income............. -- 18,306 -- -- 2,373,529 -- 2,391,835
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 161,500 178,111 25,000,000 (23,149,640) 18,286,063 (2,864,898) 17,611,136
Distributions to
limited partners
($69.55 per limited
partner unit)......... -- -- -- (3,477,747) -- -- (3,477,747)
Net income............. -- 15,027 -- -- 1,721,856 -- 1,736,883
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $161,500 $193,138 $25,000,000 $(26,627,387) $20,007,919 $(2,864,898) $15,870,272
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants............. $ 1,768,910 $ 2,268,568 $ 2,226,794
Distributions from unconsolidated joint
ventures.............................. 142,001 19,647 31,670
Cash paid for expenses................. (202,117) (325,067) (175,148)
Interest received...................... 112,502 58,541 8,438
----------- ----------- -----------
Net cash provided by operating
activities........................... 1,821,296 2,021,689 2,091,754
----------- ----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of land and
buildings............................. 3,647,241 3,023,357 --
Deposit received on sale of land
parcel................................ -- -- 51,400
Additions to land and buildings........ (150,000) (1,272,960) --
Investment in joint ventures........... (1,096,678) (703,667) --
Collections on mortgage note
receivable............................ 678,730 6,270 --
Decrease (increase) in restricted
cash.................................. 245,377 (245,377) --
Decrease (increase) in other assets.... -- 2,135 (2,135)
----------- ----------- -----------
Net cash provided by investing
activities........................... 3,324,670 809,758 49,265
----------- ----------- -----------
Cash Flows From Financing Activities:
Proceeds from loans from corporate
general partner....................... -- 117,000 661,400
Repayment of loans from corporate
general partner....................... -- (117,000) (661,400)
Distributions to holder of minority
interest.............................. (20,197) (20,080) (20,082)
Distributions to limited partners...... (3,571,747) (2,376,000) (2,376,000)
----------- ----------- -----------
Net cash used in financing
activities........................... (3,591,944) (2,396,080) (2,396,082)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ 1,554,022 435,367 (255,063)
Cash and Cash Equivalents at Beginning
of Year................................ 493,118 57,751 312,814
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 2,047,140 $ 493,118 $ 57,751
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 1,736,883 $ 2,391,835 $ 1,814,657
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense....................... -- 32,360 924
Depreciation........................... 299,355 368,182 424,766
Amortization........................... 9,238 600 600
Minority interest in income of
consolidated joint venture............ 17,285 17,285 17,282
Equity in earnings of unconsolidated
joint ventures, net of distributions.. 119,293 167,817 19,930
Gain on sale of land and buildings..... (497,321) (1,027,590) --
Provision for loss on land and building
and impairment in carrying value of
net investment in direct financing
lease................................. 25,821 32,819 --
Decrease (increase) in receivables..... (7,936) 182,433 (216,117)
Decrease in net investment in direct
financing leases...................... 13,970 12,056 7,331
Decrease (increase) in prepaid
expenses.............................. 7,610 (7,463) (1,297)
Decrease (increase) in accrued rental
income................................ 88,824 (40,000) (32,667)
Increase (decrease) in accounts payable
and accrued expenses.................. 173 (71,844) (4,732)
Increase (decrease) in due to related
parties............................... 2,099 (20,621) 48,944
Increase (decrease) in rents paid in
advance and deposits.................. 6,002 (16,180) 12,133
----------- ----------- -----------
Total adjustments..................... 84,413 (370,146) 277,097
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 1,821,296 $ 2,021,689 $ 2,091,754
=========== =========== ===========
Supplemental Schedule on Non-Cash
Investing and Financing Activities:
Mortgage note accepted as consideration
in sale of land and building.......... $ -- $ 685,000 $ --
=========== =========== ===========
Deferred real estate disposition fee
incurred and unpaid at end of year.... $ 53,400 $ 15,150 $ --
=========== =========== ===========
Distributions declared and unpaid at
end of year........................... $ 500,000 $ 594,000 $ 594,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund III, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food restaurant
chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, will be removed from the accounts and gains or
losses from sales will be reflected in income. The general partners of the
Partnership review properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through operations. The general partners determine whether an
impairment in value has occurred by comparing the estimated future undiscounted
cash flows, including the residual value of the property, with the carrying
cost of the individual property. If an impairment is indicated, the assets are
adjusted to their fair value. Although the general partners have made their
best estimate of these factors based on current conditions, it is reasonably
possible that changes could occur in the near term which could adversely affect
the general partners' estimate of net cash flows expected to be generated from
its properties and the need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership continues to pursue collection of such amounts. If amounts are
subsequently determined to be uncollectible, the corresponding receivable and
allowance for doubtful accounts are decreased accordingly.
F-12
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Investment in Joint Ventures--The Partnership accounts for its 69.07%
interest in Tuscawilla Joint Venture using the consolidation method. Minority
interest represents the minority joint venture partners' proportionate share of
the equity in the Partnership's consolidated joint venture. All significant
intercompany accounts and transactions have been eliminated.
The Partnership's investment in Titusville Joint Venture, RTO Joint Venture,
and a property in each of Englewood, Colorado, Miami, Florida, and Overland
Park, Kansas held as tenants-in-common with affiliates, is accounted for using
the equity method since the Partnership shares control with affiliates of the
general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Lease Costs--Brokerage fees associated with negotiating a new lease are
amortized over the term of the new lease using the straight-line method. Lease
costs are written off during the period in which a lease is terminated.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
Reclassification--Certain items in the prior year's financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
2. Leases:
The Partnership leases its land and buildings primarily to operators of
national and regional fast-food restaurants. The leases are accounted for under
the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." The leases generally are classified as operating
leases; however, a few of the leases have been classified as direct financing
leases. For the leases classified as direct financing leases, the
F-13
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
building portions of the property leases are accounted for as direct financing
leases while the land portion of these leases are operating leases.
Substantially all leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant generally pays all property taxes
and assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew the
leases for two or five successive five-year periods subject to the same terms
and conditions as the initial lease. Most leases also allow the tenant to
purchase the property at fair market value after a specified portion of the
lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................ $ 5,926,601 $ 7,325,960
Buildings....................................... 8,231,130 10,891,910
----------- -----------
14,157,731 18,217,870
Less accumulated depreciation................... (2,738,895) (3,341,624)
----------- -----------
11,418,836 14,876,246
Less allowance for loss on land and building.... -- (240,663)
----------- -----------
$11,418,836 $14,635,583
=========== ===========
</TABLE>
As of January 1, 1996, the Partnership had recorded an allowance for loss on
land and building in the amount of $207,844 for financial reporting purposes
for the Po Folks property in Hagerstown, Maryland. In addition, during 1997,
the Partnership increased the allowance for loss on land and building by an
additional $32,819 for such property.
The aggregate allowance represented the difference between the property's
carrying value at December 31, 1997, and the estimated net realizable value of
the property based on the anticipated sales price relating to this property.
The Partnership sold this property during the year ended December 31, 1998, as
described below.
In January 1997, the Partnership sold its property in Chicago, Illinois, to
a third party, for $505,000 and received net sales proceeds of $496,418,
resulting in a gain of $3,827 for financial reporting purposes. The Partnership
used $452,000 of the net sales proceeds to pay liabilities of the Partnership,
including quarterly distributions to the limited partners. The balance of the
fund were used to pay past due real estate taxes relating to this property
incurred by the Partnership as a result of the former tenant declaring
bankruptcy.
In March 1997, the Partnership sold its property in Bradenton, Florida, to
the tenant, for $1,332,154 and received net sales proceeds of $1,305,671,
resulting in a gain of $361,368 for financial reporting purposes. This property
was originally acquired by the Partnership in June 1988 and had a cost of
approximately $1,080,500, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $229,500 in excess of its original purchase price. In June 1997,
the Partnership reinvested approximately $1,276,000 of the net sales proceeds
received in a property in Fayetteville, North Carolina.
In April 1997, the Partnership sold its property in Kissimmee, Florida, to a
third party, for $692,400 and received net sales proceeds of $673,159,
resulting in a gain of $271,929 for financial reporting purposes. This property
was originally acquired by the Partnership in March 1988 and had a cost of
approximately $474,800, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property
F-14
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
for approximately $196,400 in excess of its original purchase price. In July
1997, the Partnership reinvested approximately $511,700 of these net sales
proceeds in a property located in Englewood, Colorado, as tenants-in-common
with an affiliate of the general partners (see Note 5).
In April 1996, the Partnership received $51,400 as partial settlement in a
right of way taking relating to a parcel of land of the property in Plant City,
Florida. In April 1997, the Partnership received the remaining proceeds of
$73,600 finalizing the sale of the land parcel. In connection therewith, the
Partnership recognized a gain of $94,320 for financial reporting purposes.
In addition, in June 1997, the Partnership sold its property in Roswell,
Georgia, to a third party for $985,000 and received net sales proceeds of
$942,981, resulting in a gain of $237,608 for financial reporting purposes.
This property was originally acquired by the Partnership in June 1988 and had a
cost of approximately $775,200, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $167,800 in excess of its original purchase price. In connection
therewith, the Partnership received $257,981 in cash and accepted the remaining
sales proceeds in the form of a promissory note in the principal sum of
$685,000. During 1998, the Partnership collected the full amount of the
outstanding mortgage note receivable balance of $678,730 (see Note 6). In
addition, in December 1997, the Partnership reinvested approximately $192,000
of the net sales proceeds in a property located in Miami, Florida, as tenants-
in-common, with an affiliate of the general partners (see Note 5).
In October 1997, the Partnership sold its property in Mason City, Iowa, to
the tenant for $218,790 and received net sales proceeds of $216,528, resulting
in a gain of $58,538 for financial reporting purposes. This property was
originally acquired by the Partnership in March 1988 and had a cost of
approximately $190,300, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $26,700 in excess of its original purchase price. In January
1998, the Partnership reinvested the net sales proceeds in a property in
Overland Park, Kansas, with affiliates of the general partners, as tenants-in-
common (see Note 5).
During the year ended December 31, 1998, the Partnership sold its properties
in Daytona Beach, Fernandina Beach and Punta Gorda, Florida, and Hagerstown,
Maryland, for a total of $3,280,000 and received net sales proceeds of
$3,214,616, resulting in a total gain of $596,586 for financial reporting
purposes. In connection with the sales of the properties in Daytona Beach and
Fernandina Beach, Florida, the Partnership incurred deferred, subordinated,
real estate disposition fees of $53,400 (see Note 11).
In September 1998, the Partnership entered into a new lease agreement for
the Golden Corral property located in Stockbridge, Georgia. In connection
therewith, the Partnership funded $150,000 in renovation costs.
In addition, during the year ended December 31, 1998, the Partnership sold
its property in Hazard, Kentucky to a third party for $435,000, and received
net sales proceeds of $432,625, resulting in a loss of $99,265 for financial
reporting purposes.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the year ended December
31, 1998, the Partnership recognized a loss of $88,824 (net of $25,996 in
reserves and $103,830 in write-offs), income during 1997 of $40,000 (net of
$15,384 in reserves) and income of $32,667 during 1996, of such rental income.
F-15
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999........................................................... $ 1,478,029
2000........................................................... 1,478,029
2001........................................................... 1,482,555
2002........................................................... 1,459,600
2003........................................................... 1,186,149
Thereafter..................................................... 6,731,050
-----------
$13,815,412
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease term. In addition, this table does not include any amounts for future
contingent rentals which may be received on the lease based on a percentage of
the tenants' gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Minimum lease payments receivable.................. $2,042,847 $2,191,519
Estimated residual value........................... 239,432 239,432
Less unearned income............................... (1,369,387) (1,504,089)
---------- ----------
912,892 926,862
Less allowance for impairment in carrying value of
investment in direct financing lease.............. (25,821) --
---------- ----------
Net investment in direct financing leases.......... $ 887,071 $ 926,862
========== ==========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................ $ 148,672
2000............................................................ 148,672
2001............................................................ 148,672
2002............................................................ 148,672
2003............................................................ 148,672
Thereafter...................................................... 1,299,487
----------
$2,042,847
==========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or contingent rental payments that may become due in future periods
(see Note 3).
During 1998, the Partnership recorded an allowance for impairment in
carrying value of net investment in direct financing lease of $25,821 for
financial reporting purposes relating to the property in Hagerstown, Maryland,
due to financial difficulties the tenant is experiencing. The allowance
represents the difference between the carrying value of the property at
December 31, 1998, and the current estimated net realizable value for this
property.
F-16
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
5. Investment in Joint Ventures:
The Partnership has a 73.4% interest in the profits and losses of Titusville
Joint Venture which is accounted for using the equity method. The remaining
interest in the Titusville Joint Venture is held by an affiliate of the
Partnership which has the same general partners.
In July 1997, the Partnership acquired a property in Englewood Colorado, as
tenants-in-common with an affiliate of the general partners. The Partnership
accounts for its investment in this property using the equity method since the
Partnership shares control with an affiliate, and amounts relating to its
investment are included in investment in joint ventures. As of December 31,
1998, the Partnership owned a 33 percent interest in this property.
In addition, in December 1997, the Partnership acquired a property in Miami,
Florida, as tenants-in-common with affiliates of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with affiliates, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 9.84% interest in this property.
In January 1998, the Partnership acquired a property located in Overland
Park, Kansas, as tenants-in-common with affiliates of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with affiliates, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 25.87% interest in this property.
In May 1998, the Partnership entered into a joint venture arrangement, RTO
Joint Venture, with an affiliate of the general partners, to construct and hold
one restaurant property. As of December 31, 1998, the Partnership had
contributed $676,952 to purchase land and pay for construction relating to the
joint venture. Construction was completed and rent commenced in December 1998.
The Partnership holds a 46.88% interest in the profits and losses of this joint
venture at December 31, 1998. The Partnership accounts for its investment in
this joint venture under the equity method since the Partnership shares control
with an affiliate.
Titusville Joint Venture, RTO Joint Venture, and the Partnership and
affiliates, as tenants-in-common in three separate tenancy-in-common
arrangements, each own and lease one property to operators of national fast-
food or family-style restaurants. The following presents the joint venture's
condensed financial information at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building................................. $3,598,641 $3,152,962
Net investment in direct financing leases.......... 3,418,537 1,003,680
Cash............................................... 19,254 16,481
Receivables........................................ 1,241 --
Accrued rental income.............................. 66,668 11,621
Other assets....................................... 2,679 1,480
Liabilities........................................ 59,453 18,722
Partners' capital.................................. 7,047,567 4,167,502
Revenues........................................... 604,672 82,837
Provision for loss on land and building............ 125,251 147,100
Net income (loss).................................. 404,446 (157,912)
</TABLE>
F-17
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The Partnership recognized income of $22,708 and $11,740 for the years ended
December 31, 1998 and 1996, respectively, and recognized a loss totaling
$148,170, for the year ended December 31, 1997, relating to investment in joint
ventures.
6. Mortgage Note Receivable:
In connection with the sale of the property in Roswell, Georgia, in June
1997, the Partnership accepted a promissory note in the principal sum of
$685,000 collateralized by a mortgage on the property. The Partnership
collected the full amount of the outstanding mortgage note, including interest,
during the year ended December 31, 1998.
The mortgage note receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
----- --------
<S> <C> <C>
Principal balance............................................ $ -- $678,730
Accrued interest receivable.................................. -- 2,957
----- --------
$ -- $681,687
===== ========
</TABLE>
7. Receivables:
During 1996, the Partnership terminated its lease with the former tenant of
its properties in Hagerstown, Maryland. In connection therewith, the
Partnership wrote off approximately $238,300 included in receivables relating
to both the Denny's and Po Folks properties in Hagerstown, Maryland, and the
related allowance for doubtful accounts. In October 1996, the Partnership
entered into a lease agreement with a new tenant to operate the Denny's
property and accepted a promissory note from the current tenant whereby
$25,000, which had been included in receivables for past due rents from the
former tenant, was converted to a loan receivable held by the Partnership to
facilitate the asset purchase agreement between the former and current tenants.
The promissory note bears interest at a rate of ten percent per annum, is being
collected in 36 equal monthly installments of $807 and commenced in October
1996. Receivables at December 31, 1998 and 1997, include $7,109 and $16,318,
respectively, including accrued interest of $142 and $164, respectively,
relating to the promissory note.
8. Restricted Cash:
As of December 31, 1997, net sales proceeds of $245,377 from the sale of the
property in Bradenton, Florida and Mason City, Iowa, plus accrued interest of
$6,502, were being held in interest-bearing escrow accounts pending the release
of funds by the escrow agent to acquire additional properties on behalf of the
Partnership. During the year ended December 31, 1998, these funds were released
by the escrow agent and were used to acquire additional properties.
9. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, noncumulative, noncompounded annual
return on their adjusted capital contributions (the "10% Preferred Return").
F-18
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their cumulative
10% Preferred Return, plus the return of their adjusted capital contributions.
The general partners will then receive, to the extent previously subordinated
and unpaid, a one percent interest in all prior distributions of net cash flow
and a return of their capital contributions. Any remaining sales proceeds will
be distributed 95 percent to the limited partners and five percent to the
general partners. Any gain from the sale of a property not in liquidation of
the Partnership is, in general, allocated in the same manner as net sales
proceeds are distributable. Any loss from the sale of a property is, in
general, allocated first, on a pro rata basis, to partners with positive
balances in their capital accounts; and thereafter, 95 percent to the limited
partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the year ended December 31, 1998, the Partnership declared
distributions to the limited partners of $3,477,747 and during each of the
years ended December 31, 1997 and 1996, the Partnership declared distributions
to the limited partners of $2,376,000. Distributions for the year ended
December 31, 1998, including $1,477,747 as a result of distributions of net
sales proceeds from the sale of the properties in Fernandina Beach and Daytona
Beach, Florida. This amount was applied toward the limited partners' cumulative
10% Preferred Return. No distributions have been made to the general partners
to date.
F-19
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
10. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.................................. $1,736,883 $2,391,835 $1,814,657
Depreciation for tax reporting purposes in
excess of depreciation for financial
reporting purposes........................ (17,075) (21,782) (9,754)
Allowance for loss on land and building and
impairment in carrying value of net
investment in direct financing lease...... 25,821 32,819 --
Direct financing leases recorded as
operating leases for tax reporting
purposes.................................. 13,970 12,056 7,330
Gain on sale of land for tax reporting
purposes.................................. -- -- 20,724
Gain on sale of land and buildings for
financial reporting purposes in excess of
gain on sale for tax reporting purposes... (115,137) (689,281) --
Equity in earnings of joint ventures for
tax reporting purposes in excess of (less
than) equity in earnings of joint ventures
for financial reporting purposes.......... 59,725 140,707 (1,329)
Allowance for doubtful accounts............ (871) 84,326 (283,135)
Accrued rental income...................... 88,824 (40,000) (32,667)
Capitalization of transaction costs for tax
reporting purposes........................ 14,227 -- --
Rents paid in advance...................... 6,002 (16,680) 12,133
Minority interest in timing differences of
consolidated joint venture................ (35) (133) (162)
---------- ---------- ----------
Net income for federal income tax
purposes.................................. $1,812,334 $1,893,867 $1,527,797
========== ========== ==========
</TABLE>
11. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors,
Inc. (hereinafter referred to as the "Affiliate") performed certain services
for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a property
management agreement with the Partnership. In connection therewith, the
Partnership agreed to pay the Affiliate an annual, noncumulative, subordinated
management fee of one-half of one percent of the Partnership assets under
management (valued at cost) annually. The property management fee is limited to
one percent of the sum of gross operating revenues from joint ventures or
competitive fees for comparable services. In addition, these fees will be
incurred and will be payable only after the limited partners receive their
aggregate, noncumulative 10% Preferred Return. Due to the fact that these fees
are noncumulative, if the limited partners do not receive their 10% Preferred
Return in any particular year, no property management fees will be due or
payable for such year. As a result of such threshold, no property management
fees were incurred during the years ended December 31, 1998, 1997, and 1996.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties, based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the
F-20
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
sales. However, if the net sales proceeds are reinvested in a replacement
property, no such real estate disposition fees will be incurred until such
replacement property is sold and the net sales proceeds are distributed. The
payment of the real estate disposition fee is subordinated to receipt by the
limited partners of their aggregate, cumulative 10% Preferred Return, plus
their adjusted capital contributions. During the years ended December 31, 1998
and 1997, the Partnership incurred $53,400 and $15,150, respectively, in
deferred, subordinated real estate disposition fees as a result of the
Partnership's sale of the properties in Daytona Beach and Fernandina Beach,
Florida, and the Property in Chicago, Illinois, respectively. No deferred,
subordinated real estate disposition fees were incurred for the year ended
December 31, 1996.
During the years ended December 31, 1998, 1997, and 1996, the Affiliates
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $89,756, $87,056, and $85,906 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership.......... $ 41,888 $38,492
Accounting and administrative services...................... 42,449 43,746
Deferred, subordinated real estate disposition fee.......... 68,550 15,150
-------- -------
$152,887 $97,388
======== =======
</TABLE>
12. Concentration of Credit Risk:
For the years ended December 31, 1998, 1997, and 1996, rental income from
Golden Corral Corporation was $454,380, $474,553, and $490,196, respectively,
representing more than ten percent of the Partnership's total rental and earned
income (including the Partnership's share of rental and earned income from
joint ventures and the properties held as tenants-in-common with affiliates).
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of rental and earned income from joint ventures and the properties held
as tenants-in-common with affiliates) for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants... $454,380 $474,553 $490,196
KFC........................................... 277,508 261,415 254,646
Pizza Hut..................................... 211,507 255,055 292,795
Taco Bell..................................... N/A 250,140 254,395
Perkins....................................... N/A N/A 276,114
Denny's....................................... N/A 229,537 355,123
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to release the properties in a timely manner.
F-21
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
13. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 2,082,901 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $20,535,734 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
14. Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 13 being adjusted to 1,041,451 shares valued at $20.00 per
APF share.
F-22
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of the Advisor
and the CNL Restaurant Financial Services Group, and the acquisition of the
Income Fund (the acquisition of the Income Fund is referred to as the
"Acquisition"), and is based on estimates and assumptions set forth below in
the notes to such information which included pro forma adjustments. This
unaudited pro forma financial information has been prepared utilizing the
historical financial statements of APF, the historical financial information of
the Income Fund, the Advisor and CNL Restaurant Financial Services Group (shown
separately as CFS and CFC) and should be read in conjunction with the selected
historical financial data and accompanying notes of APF, Income Fund, Advisor
and CNL Restaurant Financial Services Group. The pro forma balance sheet
assumes that the Acquisition occurred on 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.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of March 31, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------ ------------ ------------ ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Land and Building on
operating leases (net
depreciation)......... $475,787,661 $ 58,749,637 (A) $534,537,298 $ 0 $ 0 $ 0
Net Investment in
Direct Financing
Leases................ 123,270,117 0 123,270,117 0 0 0
Mortgages and Notes
Receivable............ 41,269,740 0 41,269,740 0 0 247,896,287
Other Investments...... 16,199,792 0 16,199,792 0 0 6,353,482
Investment In Joint
Ventures.............. 1,083,564 0 1,083,564 0 0 0
Cash and Cash
Equivalents........... 35,796,119 (25,093,119)(A) 10,703,000 591,712 552,415 4,896,688
Restricted
Cash/Certificates of
Deposit............... 2,007,278 0 2,007,278 0 0 853,243
Receivables (net
allowances)/Due from
Related Party......... 548,862 0 548,862 7,141,967 5,457,493 1,969,339
Accrued Rental Income.. 5,007,334 0 5,007,334 0 0 0
Other Assets........... 7,723,678 0 7,723,678 490,141 298,498 2,731,394
Goodwill............... 0 0 0 0 0 0
------------ ------------ ------------ ---------- ---------- ------------
Total Assets........... $708,694,145 $ 33,656,518 $742,350,663 $8,223,820 $6,308,406 $264,700,433
============ ============ ============ ========== ========== ============
Liabilities and Equity:
Accounts Payable and
Accrued Liabilities... $ 3,464,190 $ 0 $ 3,464,190 $ 576,531 $ 304,375 $ 1,613,959
Accrued Construction
Costs Payable......... 10,172,169 0 10,172,169 0 0 0
Distributions Payable.. 0 0 0 119,808 0 0
Due to Related
Parties............... 148,629 0 148,629 0 563,724 31,310,681
Income Tax Payable..... 0 0 0 0 0 271,741
Line of Credit/Notes
payable............... 34,150,000 33,656,518 (A) 67,806,518 386,229 0 226,937,481
Deferred Income........ 2,052,530 0 2,052,530 0 0 0
Rents Paid in Advance.. 1,340,636 0 1,340,636 0 0 0
Minority Interest...... 280,970 0 280,970 0 0 0
Common Stock........... 373,483 0 373,483 0 0 0
Common Stock--Class A.. 0 0 0 6,400 2,000 200
Common Stock--Class B.. 0 0 0 3,600 724 501
Additional Paid-in-
capital............... 670,005,177 0 670,005,177 4,617,047 5,303,503 3,937,095
Accumulated
distributions in
excess of net
earnings.............. (13,293,639) 0 (13,293,639) 2,514,205 134,080 628,775
Partners Capital....... 0 0 0 0 0 0
------------ ------------ ------------ ---------- ---------- ------------
Total Liabilities and
Equity................ $708,694,145 $ 33,656,518 $742,350,663 $8,223,820 $6,308,406 $264,700,433
============ ============ ============ ========== ========== ============
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of March 31, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted Pro
Adjustments APF Fund III, Ltd. Adjustments Forma
------------ -------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Assets:
Land and Building on
operating leases (net
depreciation)......... $ 0 $ 534,537,298 $11,676,552 $ 4,740,703 (B2) $ 550,954,553
Net Investment in
Direct Financing
Leases................ 0 123,270,117 1,494,852 1,209,580 (B2) 125,974,549
Mortgages and Notes
Receivable............ 0 289,166,027 0 0 289,166,027
Other Investments...... 0 22,553,274 0 0 22,553,274
Investment In Joint
Ventures.............. 0 1,083,564 2,153,198 838,295 (B2) 4,075,057
Cash and Cash (1,549,986)(B2)
Equivalents........... (9,153,014)(B1) 7,590,801 1,044,255 (266,000)(B2) 6,819,070
Restricted
Cash/Certificates of
Deposit............... 0 2,860,521 0 0 2,860,521
Receivables (net
allowances)/Due from
Related Party......... (148,629)(C) 14,969,032 64,657 (141,182)(E) 14,892,507
Accrued Rental Income.. 0 5,007,334 75,172 (75,172)(B2) 5,007,334
Other Assets........... (2,792,876)(B1) 8,450,835 37,302 (37,302)(B2) 8,450,835
Goodwill............... 43,283,491 (B1) 43,283,491 0 0 43,283,491
------------ -------------- ----------- ------------ --------------
Total Assets........... $ 31,188,972 $1,052,772,294 $16,545,988 $ 4,718,936 $1,074,037,218
============ ============== =========== ============ ==============
Liabilities and Equity:
Accounts Payable and
Accrued Liabilities... $ 0 $ 5,959,055 $ 45,870 $ 0 $ 6,004,925
Accrued Construction
Costs Payable......... 0 10,172,169 0 0 10,172,169
Distributions Payable.. 0 119,808 500,000 0 619,808
Due to Related
Parties............... (148,629)(C) 31,874,405 141,182 (141,182)(E) 31,874,405
Income Tax Payable..... (271,741)(D) 0 0 0 0
Line of Credit/Notes
payable............... 0 295,130,228 0 0 295,130,228
Deferred Income........ 0 2,052,530 0 0 2,052,530
Rents Paid in Advance.. 0 1,340,636 20,982 0 1,361,618
Minority Interest...... 0 280,970 135,060 0 416,030
Common Stock........... 61,500 (B1) 434,983 0 10,282 (B2) 445,265
Common Stock--Class A.. (8,600)(B1) 0 0 0 0
Common Stock--Class B.. (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital............... 122,938,500 (B1) 792,943,677 0 20,552,730 (B2) 813,496,407
(13,857,645)(B1)
Accumulated
distributions in
excess of net
earnings.............. (3,277,060)(B1) (87,536,167) 0 0 (87,536,167)
(74,514,269)(B1)
271,741 (D)
Partners Capital....... 0 0 15,702,894 (15,702,894)(B2) 0
------------ -------------- ----------- ------------ --------------
Total Liabilities and
Equity................ $ 31,188,972 $1,052,772,294 $16,545,988 $ 4,718,936 $1,074,037,218
============ ============== =========== ============ ==============
</TABLE>
F-25
<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
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $12,184,008 2,339,153 (a) $14,523,161 $ 0 $ 0 $ 0
Fees................... 0 0 0 2,307,364 1,391,466 8,137
Interest and Other
Income................ 2,214,763 0 2,214,763 47,213 129,362 5,233,919
----------- ---------- ----------- ---------- ---------- ----------
Total Revenue.......... $14,398,771 $2,339,153 $16,737,924 $2,354,577 $1,520,828 $5,242,056
Expenses:
General and
Administrative
Expenses.............. 1,095,269 0 1,095,269 2,563,714 1,323,577 64,186
Management and Advisory
Fees.................. 697,364 0 697,364 0 0 611,196
Fees Paid to Related
Parties............... 0 0 0 23,326 292,575 0
Interest Expense....... 0 0 0 50,730 0 4,769,268
State Taxes............ 235,208 0 235,208 0 0 0
Depreciation--Other.... 0 0 0 39,581 26,238 0
Depreciation--
Property.............. 1,548,813 349,465 (a) 1,898,278 0 0 0
Amortization........... 7,368 0 7,368 0 0 0
Transaction Costs...... 125,926 0 125,926 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
Total Expenses......... 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, 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)
Equity Earnings of
joint
Ventures/Minority
Interest.............. 17,271 0 17,271 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Provision For Loss on
Properties............ (215,797) 0 (215,797) 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
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)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 127,496 48,017 73,166
----------- ---------- ----------- ---------- ---------- ----------
Net Earnings (Losses)... $10,490,297 $1,989,688 $12,479,985 $ (195,278) $ (73,545) $ (129,428)
=========== ========== =========== ========== ========== ==========
Earnings Per
Share/Unit............. $ .28 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ==========
Book Value Per
Share/Unit............. $ 18 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ==========
Dividends Per
Share/Unit............. $ .38 $ 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
=========== ========== =========== ========== ========== ==========
Wtd. Avg. Units
Outstanding............ 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
=========== ========== =========== ========== ========== ==========
Shares Outstanding...... 37,348,464 n/a 37,348,464 n/a n/a n/a
=========== ========== =========== ========== ========== ==========
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 Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund III, Ltd. Adjustments Pro Forma
----------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ 0 $14,523,161 $429,827 584 (j) $ 14,953,572
Fees................... (2,450,663)(b),(c) 1,256,304 0 (13,593)(k) 1,242,711
Interest and Other
Income................ 62,068 (d) 7,687,325 16,470 0 7,703,795
----------- ----------- -------- --------- ------------
Total Revenue.......... $(2,388,595) $23,466,790 $446,297 $ (13,009) $ 23,900,078
Expenses:
General and
Administrative
Expenses.............. (377,734)(e) 4,669,012 38,010 (23,353)(l),(m) 4,683,669
Management and Advisory
Fees.................. (1,308,560)(f) 0 0 0 (n) 0
Fees Paid to Related
Parties............... (292,786)(g) 23,115 0 0 23,115
Interest Expense....... 0 4,819,998 0 0 4,819,998
State Taxes............ 0 235,208 12,617 4,248 (o) 252,073
Depreciation--Other.... 0 65,819 0 0 65,819
Depreciation--
Property.............. 0 1,898,278 69,280 36,556 (p) 2,004,114
Amortization........... 541,044 (h) 548,412 0 0 548,412
Transaction Costs...... 0 125,926 30,882 0 156,808
----------- ----------- -------- --------- ------------
Total Expenses......... (1,438,036) 12,385,768 150,789 17,451 12,554,008
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties and
Provision for Losses on
Properties ............ $ (950,559) $11,081,022 $295,508 $ (30,460) $ 11,346,070
Equity Earnings of
joint
Ventures/Minority
Interest.............. 0 17,271 37,114 (7,619)(q) 46,766
Gain on Sale of
Properties............ 0 0 0 0 0
Provision For Loss on
Properties............ 0 (215,797) 0 0 (215,797)
----------- ----------- -------- --------- ------------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... (950,559) 10,882,496 332,622 (38,079) 11,177,039
Benefit/(Provision) for
Federal Income Taxes.. (248,679)(i) 0 0 0 0
----------- ----------- -------- --------- ------------
Net Earnings (Losses)... $(1,199,238) $10,882,496 $332,622 $ (38,079) $ 11,177,039
=========== =========== ======== ========= ============
Earnings Per
Share/Unit............. $ n/a $ n/a $ 6.65 $ n/a $ .25
=========== =========== ======== ========= ============
Book Value Per
Share/Unit............. $ n/a $ n/a $ 314.06 $ n/a $ 16.31
=========== =========== ======== ========= ============
Dividends Per
Share/Unit............. $ n/a $ n/a $ 10 $ n/a $ n/a
=========== =========== ======== ========= ============
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.19x
=========== =========== ======== ========= ============
Wtd. Avg. Units
Outstanding............ n/a n/a 50,000 n/a n/a
=========== =========== ======== ========= ============
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,401 n/a 1,028,151 44,525,552 (r)
=========== =========== ======== ========= ============
Shares Outstanding...... 6,150,000 43,498,464 n/a 1,028,151 44,526,615
=========== =========== ======== ========= ============
Calculation of Pro Forma
Distributions:
Pro Forma Cash from
Operations from
Statement of Cash
Flows................. $(23,256,843)
Addback Pro Forma
Investments in Notes
Receivable............ 42,571,895
------------
Adjusted Pro Forma
Distributions Declared: $ 19,315,052 (s)
============
Pro Forma Wtd. Avg.
Dollars Outstanding.... $890,511,032 (t)
============
Pro Forma Cash
Distributions Declared
per $10,000
Investment............. $ 217 (u)
============
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNLl Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 21,919,865(a) $55,049,526 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $21,919,865 $64,106,902 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 2,889,368(a) 6,931,658 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 2,889,368 12,298,325 11,435,228 7,966,916 25,677,829
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties,
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)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Other Expenses......... 0 0 0 0 0 0
Provision For Loss on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
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
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $19,030,497 $51,182,905 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Units
Outstanding............ n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,561,014 34,209,233 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 34,757 37,372,684 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Calculation of Pro Forma
Distributions Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows.............
Addback Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable......
Addback Pro Forma
Investments in Notes
Receivable............
Adjusted Pro Forma
Distributions Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted Pro
Adjustments APF Fund III, Ltd. Adjustments Forma
------------ ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ 0 $55,049,526 $1,653,767 2,336 (j) $ 56,705,629
Fees................... (32,715,768)(b),(c) 3,226,263 0 (30,542)(k) 3,195,721
Interest and Other
Income................ 207,144 (d) 32,221,925 127,064 0 32,348,989
------------ ----------- ---------- --------- -------------
Total Revenue.......... $(32,508,624) $90,497,714 $1,780,831 $ (28,206) $ 92,250,339
Expenses:
General and
Administrative........ (4,241,719)(e) 15,939,556 185,802 (68,010)(l),(m) 16,057,348
Management and Advisory
Fees.................. (4,658,434)(f) 0 0 0 (n) 0
Fees to Related
Parties............... (2,161,897)(g) 858,787 0 0 858,787
Interest Expense....... 0 21,498,589 0 0 21,498,589
State Taxes............ 0 567,446 12,249 6,404 (o) 586,099
Depreciation--Other.... 0 199,157 0 0 199,157
Depreciation--
Property.............. (340,898)(r) 6,590,760 299,355 146,226 (p) 7,036,341
Amortization........... 2,164,175 (h) 2,328,176 9,238 0 2,337,414
Transaction Costs...... 0 157,054 14,227 0 171,281
------------ ----------- ---------- --------- -------------
Total Expenses......... (9,238,773) 48,139,525 520,871 84,620 48,745,016
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties,
Provision for Losses on
Properties and
Other Expenses......... $(23,269,851) $42,358,189 $1,259,960 $(112,826) $ 43,505,323
Equity in Earnings of
Joint
Venture/Minority
Interest.............. 0 (14,138) 5,423 (30,475)(q) (39,190)
Gain on Sale of
Properties............ 0 0 497,321 0 497,321
Gain on
Securitization........ 0 3,694,351 0 0 3,694,351
Other Expenses......... 0 0 0 0 0
Provision For Loss on
Properties............ 0 (611,534) (25,821) 0 (637,355)
------------ ----------- ---------- --------- -------------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... (23,269,851) 45,426,868 1,736,883 (143,301) 47,020,450
Benefit/(Provision) for
Federal Income
Taxes................. 6,898,434 (i) 0 0 0 0
------------ ----------- ---------- --------- -------------
Net Earnings (Losses)... $(16,371,417) $45,426,868 $1,736,883 $(143,301) $ 47,020,450
============ =========== ========== ========= =============
Earnings Per
Share/Unit............. $ n/a $ n/a $ 34.74 $ n/a $ 1.14
============ =========== ========== ========= =============
Book Value Per
Share/Unit............. $ n/a $ n/a $ 317.41 $ n/a $ 16.36
============ =========== ========== ========= =============
Dividends Per
Share/Unit............. $ n/a $ n/a $ 69.55 $ n/a $ n/a
============ =========== ========== ========= =============
Ratio of Earnings to
Fixed Charges.......... $ n/a $ n/a $ n/a $ n/a 3.13x
============ =========== ========== ========= =============
Wtd. Avg. Units
Outstanding............ n/a n/a 50,000 n/a n/a
============ =========== ========== ========= =============
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,359,233 n/a 1,028,151 41,387,384 (s)
============ =========== ========== ========= =============
Shares Outstanding...... 6,150,000 43,522,684 n/a 1,028,151 44,550,835
============ =========== ========== ========= =============
Calculation of Pro Forma
Distributions
Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows............. $ 57,277,067
Subtract Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable...... (265,871,668)
Addback Pro Forma
Investments in Notes
Receivable............ 288,590,674
-------------
$ 79,996,073 (t)
=============
Adjusted Pro Forma
Distributions Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding.... $ 827,747,663 (u)
=============
Pro Forma Cash
Distributions Declared
per
$10,000 Investment..... $ 966 (v)
=============
</TABLE>
F-29
<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 Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 10,490,297 $ 1,989,688(a) $ 12,479,985 $ (195,278) $ (73,545) $ (129,428)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 1,548,813 349,465(b) 1,898,278 39,581 0 0
Amortization expense... 7,368 0 7,368 0 26,238 424,697
Minority interest in
income of consolidated
joint venture......... 7,763 0 7,763 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 23,234 0 23,234 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 215,797 0 215,797 0 0 (73,166)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (82,660) 0 (82,660) (377,933) (242,251) (6,771)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (449,580)
Investment in notes
receivable............ 0 0 0 0 0 (42,571,895)
Collections on notes
receivable............ 0 0 0 0 0 6,417,907
Increase in restricted
cash.................. 0 0 0 0 0 (402,461)
Decrease in due from
related party......... 0 0 0 0 0 55,382
Decrease (increase) in
prepaid expenses...... 27,548 0 27,548 0 1,811 0
Decrease in net
investment in direct
financing leases...... 787,375 0 787,375 0 0 0
Increase in accrued
rental income......... (1,047,421) 0 (1,047,421) 0 0 0
Decrease (increase) in
intangibles and other
assets................ (30,554) 7,942
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 306,277 0 306,277 (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 0 71,853 25,550 0 0
Decrease in accrued
interest.............. 0 0 0 0 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 386,365 0 386,365 0 0 0
Increase (decrease) in
deferred rental
income................ 862,647 0 862,647 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Total adjustments...... 3,114,959 349,465 3,464,424 (1,183,414) (344,708) (37,064,802)
------------- ------------ ------------- ----------- --------- ------------
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)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 0 0 0 0
Additions to land and
buildings on operating
leases................ (77,028,830)(A) (58,749,637)(e) (135,778,467) (31,577) (10,092) 0
Investment in direct
financing leases...... (29,608,346) 0 (29,608,346) 0 0 0
Investment in joint
venture............... (117,662) 0 (117,662) 0 0 0
Acquisition of
businesses............
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 134,981
Investment in mortgage
notes receivable...... (1,388,463) 0 (1,388,463) 0 0 0
Collections on mortgage
note receivable....... 75,010 0 75,010 0 0 0
Investment in notes
receivable............ (1,087,483) 0 (1,087,483) 0 0 0
Collection on notes
receivable............ 239,596 0 239,596 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... 0 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) investing
activities............ (108,916,178) (58,749,637) (167,665,815) (31,577) (10,092) 134,981
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,735 0 210,735 1,288,673 20,572 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,142,237) 0 (1,142,237) 0 0 0
Payment of stock
issuance costs........ (722,001) 0 (722,001) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 36,587,245 (A) 33,656,518 (e) 70,243,763 0 0 49,730,934
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (2,385) (10,291,473)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (8,610) 0 (8,610) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0 0
Distributions to
stockholders.......... (14,237,405) 0 (14,237,405) 0 0 0
Other.................. (200,234) 0 (200,234) 0 0 (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 (decrease)
in cash................ (87,403,718) (22,753,966) (110,157,684) (121,596) (410,158) 2,370,610
Cash at beginning of
year................... 123,199,837 0 123,199,837 713,308 962,573 2,526,078
------------- ------------ ------------- ----------- --------- ------------
Cash at end of year..... $ 35,796,119 $(22,753,966) $ 13,042,153 $ 591,712 $ 552,415 $ 4,896,688
============= ============ ============= =========== ========= ============
</TABLE>
F-30
<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>
Combining Historical Merger
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund III, Ltd. Adjustments Pro Forma
----------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income (loss).......................... $(1,199,238)(a) $ 10,882,496 $ 332,622 $ (38,079)(a) $ 11,177,039
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.............................. 0 1,937,859 69,280 36,556 (b) 2,043,695
Amortization expense...................... 541,044 (c) 999,347 0 0 999,347
Minority interest in income of
consolidated joint venture............... 0 7,763 4,345 0 12,108
Equity in earnings of joint ventures, net
of distributions......................... 0 23,234 3,949 7,619 (d) 34,802
Loss (gain) on sale of land, buildings,
and net investment in direct financing
leases................................... 0 0 0 0 0
Provision for loss on land, buildings, and
direct financing leases.................. 0 142,631 0 0 142,631
Gain on securitization.................... 0 0 0 0 0
Net cash proceeds from securitization of
notes receivable......................... 0 0 0 0 0
Decrease (increase) in other receivables.. 0 (709,615) 24,862 0 (684,753)
Increase in accrued interest income
included in notes receivable............. 0 0 0 0 0
Decrease (increase) in accrued interest on
mortgage note receivable................. 0 (449,580) 0 0 (449,580)
Investment in notes receivable............ 0 (42,571,895) 0 0 (42,571,895)
Collections on notes receivable........... 0 6,417,907 0 0 6,417,907
Increase in restricted cash............... 0 (402,461) 0 0 (402,461)
Decrease in due from related party........ 0 55,382 0 0 55,382
Decrease (increase) in prepaid expenses... 0 29,359 (1,197) 0 28,162
Decrease in net investment in direct
financing leases......................... 0 787,375 5,139 0 792,514
Increase in accrued rental income......... 0 (1,047,421) (9,258) 0 (1,056,679)
Decrease (increase) in intangibles and
other assets............................. 0 (22,612) 0 0 (22,612)
Increase (decrease) in accounts payable,
accrued expenses and other liabilities... 0 (768,267) 28,581 0 (739,686)
Increase (decrease) in due to related
parties, excluding reimbursement of
acquisition, and stock issuance costs
paid on behalf of the entity............. 0 97,403 (11,705) 0 85,698
Decrease in accrued interest.............. 0 (362,877) 0 0 (362,877)
Increase in rents paid in advance and
deposits................................. 0 386,365 (4,597) 0 381,768
Increase (decrease) in deferred rental
income................................... 0 862,647 0 0 862,647
----------- ------------- ----------- ----------- -------------
Total adjustments......................... 541,044 (34,587,456) 109,399 44,175 (34,433,882)
----------- ------------- ----------- ----------- -------------
Net cash provided by (used in) operating
activities............................... (658,194) (23,704,960) 442,021 6,096 (23,256,843)
Cash Flows from Investing Activities:
Proceeds from sale of land, buildings,
direct financing leases, and equipment... 0 0 0 0 0
Additions to land and buildings on
operating leases......................... 0 (135,820,136) (326,996) (136,147,132)
Investment in direct financing leases..... 0 (29,608,346) (612,920) 0 (30,221,266)
Investment in joint venture............... 0 (117,662) 0 0 (117,662)
Acquisition of businesses................. (9,153,014)(f) (9,153,014) 0 (1,549,986)(g) (10,969,000)
(266,000)(g)
Purchase of other investments............. 0 0 0 0 0
Net loss in market value from investments
in trading securities.................... 0 0 0 0 0
Proceeds from retained interest and
securities, excluding investment income.. 0 134,981 0 0 134,981
Investment in mortgage notes receivable... 0 (1,388,463) 0 0 (1,388,463)
Collections on mortgage note receivable... 0 75,010 0 0 75,010
Investment in notes receivable............ 0 (1,087,483) 0 0 (1,087,483)
Collection on notes receivable............ 0 239,596 0 0 239,596
Decrease in restricted cash............... 0 0 0 0 0
Increase in intangibles and other assets.. 0 0 0 0 0
Investment in certificates of deposit..... 0 0 0 0 0
Other..................................... 0 0 0 0 0
----------- ------------- ----------- ----------- -------------
Net cash provided by (used in) investing
activities............................... (9,153,014) (176,725,517) (939,916) (1,815,986) (179,481,419)
Cash Flows from Financing Activities:
Subscriptions received from stockholders.. 0 1,519,980 0 0 1,519,980
Contributions from limited partners....... 0 0 0 0 0
Contributions from holder of minority
interest................................. 0 0 0 0 0
Reimbursement of acquisition and stock
issuance costs paid by related parties on
behalf of the entity..................... 0 (1,142,237) 0 0 (1,142,237)
Payment of stock issuance costs........... 0 (722,001) 0 0 (722,001)
Proceeds from borrowing on line of
credit/notes payable..................... 0 119,974,697 0 0 119,974,697
Payment on line of credit/notes payable... 0 (22,874,147) 0 0 (22,874,147)
Retirement of shares of common stock...... 0 0 0 0 0
Distributions to holders of minority
interest................................. 0 (8,610) (4,990) 0 (13,600)
Distributions to limited partners......... 0 0 (500,000) 0 (500,000)
Distributions to stockholders............. 0 (14,237,405) 0 0 (14,237,405)
Other..................................... 0 (209,836) 0 0 (209,836)
----------- ------------- ----------- ----------- -------------
Net cash provided by (used in) financing
activities............................... 0 82,300,441 (504,990) 0 81,795,451
Net increase (decrease) in cash............ (9,811,208) (118,130,036) (1,002,885) (1,809,890) (120,942,811)
Cash at beginning of year.................. 0 127,401,796 2,047,140 0 129,448,936
----------- ------------- ----------- ----------- -------------
Cash at end of year........................ $(9,811,208) $ 9,271,760 $ 1,044,255 $(1,809,890) $ 8,506,125
=========== ============= =========== =========== =============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income (loss)....... $ 32,152,408 $ 19,030,497(a) $ 51,182,905 $10,656,379 $ (468,133) $ 427,134
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 4,042,290 2,889,368(b) 6,931,658 119,923 79,234 0
Amortization expense... 11,808 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in......... 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) (2,187,652) 0 0 0
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 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 693,372 0 0 0
------------- ------------ ------------- ----------- ---------- -------------
Total adjustments...... 6,963,867 2,889,368 9,853,235 (3,608,563) 316,963 1,610,591
------------- ------------ ------------- ----------- ---------- -------------
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
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (58,749,637)(e) (258,851,304) (381,671) (236,372) 0
Investment in direct
financing leases...... (47,115,435) (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) (974,696) 0 0 0
Acquisition of
businesses............
Purchase of other
investments........... (16,083,055) (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) (6,281,069) 0 0 0
Other.................. 0 0 200,000 0 0
------------- ------------ ------------- ----------- ---------- -------------
Net cash provided by
(used in) investing
activities............ (277,338,756) (58,749,637) (336,088,393) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 33,656,518 (e) 41,348,558 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) (34,073) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0
Distributions to
stockholders.......... (39,449,149) (39,449,149) (9,364,488) 0 0
Other.................. (95,101) (95,101) 0 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
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
============= ============ ============= =========== ========== =============
</TABLE>
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund III, Ltd. Adjustments Pro Forma
------------------------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net Income (loss)........ $ (16,371,417)(a) $ 45,426,868 $ 1,736,883 $ (143,301)(a) $ 47,020,450
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating
activities:
Depreciation............ (340,898)(b) 6,789,917 299,355 146,226 (b) 7,235,498
Amortization expense.... 2,164,175 (c) 4,478,259 9,238 4,487,497
Minority interest in
income of consolidated
joint venture.......... 30,156 17,285 47,441
Equity in earnings of
joint ventures, net of
distributions.......... (15,440) 119,293 30,475 (d) 134,328
Loss (gain) on sale of
land, building, net
investment in.......... 0 (497,321) (497,321)
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes......... 1,009,576 25,821 1,035,397
Gain on securitization.. (3,356,538) 0 (3,356,538)
Net cash proceeds from
securitization of notes
receivable............. 265,871,668 0 265,871,668
Decrease (increase) in
other receivables...... (2,543,413) (7,936) (2,551,349)
Increase in accrued
interest income
included in notes
receivable............. (170,492) 0 (170,492)
Increase in accrued
interest on mortgage
note receivable........ 0 0 0
Investment in notes
receivable............. (288,590,674) 0 (288,590,674)
Collections on notes
receivable............. 23,539,641 0 23,539,641
Decrease in restricted
cash................... 2,504,091 0 2,504,091
Decrease (increase) in
due from related
party.................. (953,688) 0 (953,688)
Increase in prepaid
expenses............... 7,246 7,610 14,856
Decrease in net
investment in direct
financing leases....... 1,971,634 13,970 1,985,604
Increase in accrued
rental income.......... (2,187,652) 88,824 (2,098,828)
Increase in intangibles
and other assets....... (154,351) 0 (154,351)
Increase (decrease) in
accounts payable,
accrued expenses and
other
liabilities............ 846,680 173 846,853
Increase in due to
related parties,
excluding reimbursement
of acquisition, and
stock issuance costs
paid on behalf of the
entity................. (133,364) 2,099 (131,265)
Increase in accrued
interest............... (77,968) 0 (77,968)
Increase in rents paid
in advance and
deposits............... 436,843 6,002 442,845
Decrease in deferred
rental income.......... 693,372 0 693,372
------------- ------------- ----------- ----------- -------------
Total adjustments....... 1,823,277 9,995,503 84,413 176,701 10,256,617
------------- ------------- ----------- ----------- -------------
Net cash provided by
(used in) operating
activities............. (14,548,140) 55,422,371 1,821,296 33,400 57,277,067
Cash Flows from Investing Activities:
Proceeds from sale of
land, buildings, direct
financing leases, and
equipment.............. 2,385,941 3,647,241 6,033,182
Additions to land and
buildings on operating
leases................. (259,469,347) (150,000) (259,619,347)
Investment in direct
financing leases....... (47,115,435) 0 (47,115,435)
Investment in joint
venture................ (974,696) (1,096,678) (2,071,374)
Acquisition of
businesses............. (9,153,014)(f) (9,153,014) (1,549,986)(g) (10,969,000)
(266,000)(g)
Purchase of other
investments............ (16,083,055) 0 (16,083,055)
Net loss in market value
from investments in
trading securities..... 295,514 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income...... 212,821 0 212,821
Investment in mortgage
notes receivable....... (2,886,648) 0 (2,886,648)
Collections on mortgage
note receivable........ 291,990 678,730 970,720
Investment in equipment
notes receivable....... (7,837,750) 0 (7,837,750)
Collections on equipment
notes receivable....... 3,046,873 0 3,046,873
Decrease in restricted
cash................... 0 245,377 245,377
Increase in intangibles
and other assets....... (6,281,069) 0 (6,281,069)
Other................... 200,000 0 200,000
------------- ------------- ----------- ----------- -------------
Net cash provided by
(used in) investing
activities............. (9,153,014) (343,367,875) 3,324,670 (1,815,986) (341,859,191)
Cash Flows from Financing Activities:
Subscriptions received
from stockholders...... 386,592,011 0 386,592,011
Contributions from
limited partners....... 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity... (4,574,925) 0 (4,574,925)
Payment of stock
issuance costs......... (34,579,650) 0 (34,579,650)
Proceeds from borrowing
on line of credit/notes
payable................ 455,102,478 0 455,102,478
Payment on line of
credit/notes payable... (411,813,826) 0 (411,813,826)
Retirement of shares of
common stock........... (639,528) 0 (639,528)
Distributions to holders
of minority interest... (34,073) (20,197) (54,270)
Distributions to limited
partners............... 0 (3,571,747) (3,571,747)
Distributions to
stockholders........... (48,813,637) 0 (48,813,637)
Other................... (2,595,088) 0 (2,595,088)
------------- ------------- ----------- ----------- -------------
Net cash provided by
(used in) financing
activities............. 0 338,643,762 (3,591,944) 0 335,051,818
Net increase (decrease)
in cash................. (23,701,154) 50,698,258 1,554,022 (1,782,586) 50,469,694
Cash at beginning of
year.................... 49,829,130 493,118 50,322,248
------------- ------------- ----------- ----------- -------------
Cash at end of year...... $ (23,701,154) $ 100,527,388 $ 2,047,140 $(1,782,586) $ 100,791,942
============= ============= =========== =========== =============
</TABLE>
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of 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 Income Fund. This unaudited pro forma financial
information has been prepared utilizing the historical financial statements of
APF and the historical combined financial information of the Advisor, CNL
Restaurant Financial Services Group and the Income Fund and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, the Advisor the CNL Restaurant Financial Services Group and the Income
Fund. The Pro Forma Balance Sheet was prepared as if the transactions described
above occurred on 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 Fund 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 Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
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
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
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.
(B) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares Offered.......... 3,800,000 2,350,000 1,028,150.6 7,178,150.6
Exchange Value.......... $ 20 $ 20 $ 20 $ 20
----------- ------------ ------------ ------------
Share Consideration..... $76,000,000 $ 47,000,000 $ 20,563,012 $143,563,012
Cash Consideration...... -- -- 266,000 266,000
APF Transaction Costs... 5,655,521 3,497,493 1,549,986 10,703,000
----------- ------------ ------------ ------------
Total Purchase
Price.............. $81,655,521 $ 50,497,493 $ 22,378,998 $154,532,012
=========== ============ ============ ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 7,141,252 $ 10,006,878 $ 15,702,894 $ 32,851,024
Purchase Price
Adjustments:
Land and buildings on
operating leases..... 4,740,703 4,740,703
Net investment in
direct financing
leases............... 1,209,580 1,209,580
Investment in joint
ventures............. 838,295 838,295
Accrued rental
income............... (75,172) (75,172)
Intangibles and other
assets............... (2,792,876) (37,302) (2,830,178)
Goodwill*............. 43,283,491 -- 43,283,491
Excess purchase
price................ 74,514,269 -- -- 74,514,269
----------- ------------ ------------ ------------
Total Allocation.... $81,655,521 $ 50,497,493 $ 22,378,998 $154,532,012
=========== ============ ============ ============
</TABLE>
--------
* Goodwill represents the portion of the purchase price which is
assumed to relate to the ongoing value of the debt business.
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $10,703,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $74,514,269
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 43,283,491 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...... 74,514,269
Goodwill for
CFC
(Intangibles
and other
assets)....... 43,283,491
CFC/CFS Org
Costs/Other
Assets...... 2,792,876
Cash to pay
APF
transaction
costs....... 9,153,014
APF Common
Stock....... 61,500
APF APIC..... 122,938,500
(To record
acquisition of
CFA, CFS and
CFC)
2.Partners
Capital......... 15,702,894
Land and
buildings on
operating
leases........ 4,740,703
Net investment
in direct
financing
leases........ 1,209,580
Investment in
joint
ventures...... 838,295
Accrued
rental
income...... 75,172
Intangibles
and other
assets...... 37,302
Cash to pay
APF
Transaction
costs....... 1,549,986
Cash
consideration
to Income
Funds....... 266,000
APF Common
Stock....... 10,282
APF APIC..... 20,552,730
(To record
acquisition of
Income Fund)
</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 Income Fund of $141,182 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, 1999.
(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.
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................... $ (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 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
</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>
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $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)
<TABLE>
<S> <C>
Amortization of goodwill........................................ $541,044
</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 $584 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................... $ 0
Reimbursement of administrative costs......................... (13,593)
--------
$(13,593)
========
</TABLE>
(l) Represents the elimination of $13,593 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $9,760 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $4,248 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through May 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 Fund 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 $36,556 as a
result of adjusting the historical basis of the real estate wholly
owned by the Income Fund to fair value as a result of accounting
for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings is
being depreciated using the straight-line method over the remaining
useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $7,619 as a result of adjusting the historical basis of the real
estate owned by the Income Fund, indirectly through joint venture
or tenancy in common arrangements, to fair value as a result of
accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 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-39
<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
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates.......................... $ (1,773,406)
Secured equipment lease fees.............................. (54,998)
Advisory fees............................................. (305,030)
Reimbursement of administrative costs..................... (408,762)
Acquisition fees.......................................... (21,794,386)
Underwriting fees......................................... (388,491)
Administrative, executive and guarantee fees.............. (1,233,043)
Servicing fees............................................ (1,570,331)
Development fees.......................................... (229,153)
Management fees........................................... (1,851,004)
------------
Total................................................... $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the year ended
December 31, 1998, which were deferred for pro forma purposes as
described in 5(II)(c). These deferred loan origination fees are
being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs........................... $(4,241,719)
</TABLE>
F-40
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................. $(1,851,004)
Administrative executive and guarantee fees................. (1,233,043)
Servicing fees.............................................. (1,269,357)
Advisory fees............................................... (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(g) Represents the elimination of $2,161,897 in fees between the
Advisor and the CNL Restaurant Financial Services Group resulting
from agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4);
<TABLE>
<S> <C>
Amortization of goodwill...................................... $2,164,175
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $2,336 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees................................................ $ 0
Reimbursement of administrative costs.......................... (30,542)
--------
$(30,542)
========
</TABLE>
(l) Represents the elimination of $30,542 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $37,468 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $6,404 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1998 through 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 Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
(p) Represents an increase in depreciation expense of $146,226 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Fund through joint venture or tenancy in common
arrangements with affiliates or unrelated third parties, to fair
value as a result by the Income Fund to fair value as a result of
accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
F-41
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $30,475 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF
and the Advisor which on a historical basis were capitalized as
part of the basis of the building.
(s) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a reverse stock split proposal and a
proposal to increase the number of authorized common shares of APF
on January 1, 1998.
(t) 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 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.
F-42
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
6. Adjustments to Pro Forma Statement of Cash Flows
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the 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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non-Cash Investing Activities
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the use of amounts borrowed under APF's credit facility
and the use of cash to 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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
F-43
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund III, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund III, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
A-1
<PAGE>
(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
A-2
<PAGE>
Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
A-3
<PAGE>
Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among by and among CNL American Properties Fund,
Inc., a Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware
limited partnership (the "Operating Partnership"), CNL APF GP corp., a
Delaware corporation (the "OP General Partner"), CNL Income Fund III, Ltd., a
Florida limited partnership (the "Fund"), and Robert A. Bourne, James M.
Seneff, Jr., and CNL Realty Corporation, a Florida corporation (together with
Messrs. Borne and Seneff, the "General Partners"). APF, the Operating
Partnership, the OP General Partner, the Fund and the General Partners are
referred to collectively herein as the "Parties" and individually as a
"Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund
will be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. Amendments to Merger Agreement
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its
entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred
by the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote
against the Merger and affirmatively elect the note option, such limited
partners shall be entitled to receive, in lieu of the Share
Consideration, notes (the "Notes") in the aggregate amount equal to 97%
of the value (based on the Exchange Value as defined in the Registration
Statement) of the Share Consideration such Dissenting Partners would
have otherwise received had such partners not elected to receive the
Notes (the "Note Option"). The Notes will mature on the fifth
anniversary of the Closing Date and will bear interest at a fixed rate
equal to seven percent. The aggregate Share Consideration shall be
reduced on a one-for-basis for all APF Shares otherwise distributable to
Dissenting Partners had such Dissenting Partners not elected the Note
Option."
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
B-1
<PAGE>
1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to
Dissenting Limited Partners shall not have exceeded 15% of the value of
the Share Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. General
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will
constitute one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of
Florida or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Florida.
B-2
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.________
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne____________
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne____________
By: Robert A. Bourne
Its: President
CNL INCOME FUND III, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.________
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.________
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne____________
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.________
James M. Seneff, Jr., as General
Partner
B-3
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund III, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
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"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 2,082,901 fully paid and nonassessable APF Common
Shares (1,041,451 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $19,123,759, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 58,917,099 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to execute and
deliver this Agreement and to perform their obligations hereunder. The
execution, delivery and
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performance by APF, the OP General Partner and the Operating Partnership of
this Agreement have been duly and validly authorized by the boards of directors
of APF and the OP General Partner. This Agreement constitutes the valid and
legally binding obligation of APF, the OP General Partner and the Operating
Partnership, enforceable in accordance with its terms and conditions. None of
APF, the OP General Partner or the Operating Partnership needs to give any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order to consummate the
transactions contemplated by this Agreement, except in connection with federal
securities laws and any applicable "Blue Sky" or state securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions the validity of this
Agreement or any action to be taken by APF in connection with the consummation
of the
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transactions contemplated hereby or could otherwise prevent or delay the
consummation of the transactions contemplated by this Agreement. Except as
publicly disclosed by APF in any APF SEC Document, none of APF or its
Subsidiaries is subject to any outstanding order, writ, injunction or decree
which, insofar as can be reasonably foreseen in the future, could reasonably be
expected to have a Material Adverse Effect on APF or would prevent or delay the
consummation of the transactions contemplated hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material
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terms of its permits, except where the failure so to comply could not
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF, the businesses of APF and its Subsidiaries are not,
to APF's Knowledge, being conducted in violation of any law, ordinance or
regulation of any governmental entity except that no representation or warranty
is made in this Section 6.14 with respect to environmental laws and except for
violations or possible violations which do not, and, insofar as reasonably can
be foreseen, in the future will not, have a Material Adverse Effect on APF.
Except as publicly disclosed by APF in its APF SEC Documents, no investigation
or review by any governmental entity with respect to APF or its Subsidiaries is
pending or, to the Knowledge of APF, threatened, nor, to the Knowledge of APF,
has any government entity indicated an intention to conduct the same, other
than, in each case, those which APF reasonably believes will not have a
Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 50,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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<PAGE>
(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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<PAGE>
from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such leases and subleases (as amended to date). With respect to
each lease and sublease listed in Section 7.12(b) of the Disclosure Schedule:
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(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General Partners have
made available to APF and the Operating Partnership correct and complete copies
of all such licenses, sublicenses, agreements, and permissions (as amended to
date).
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(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is
in good operating condition and repair (subject to normal wear and tear), and
is suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a
party:
(a) any agreement (or group of related agreements) for the lease of
personal property to or from any Person providing for lease payments in excess
of $25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates
(other than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any
of the General Partners or the corporate General Partner's directors,
officers, and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and
effect on identical terms following the consummation of the transactions
contemplated hereby (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (C) no party is in breach or
default, and no event has occurred which with notice or lapse of time would
constitute a breach or default, or permit termination, modification, or
acceleration, under the agreement; and (D) no party has repudiated any
provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of
the Fund are reflected properly on its books and records, are valid
receivables subject to no setoffs or counterclaims, and are current and
collectible in accordance with their terms at their recorded amounts, subject
only to the reserve for bad debts set forth on the face of the Most Recent
Balance Sheet (rather than in any notes thereto) as adjusted for the passage
of time through the Closing Date in accordance with the past custom and
practice of the Fund.
7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
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7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including policies
providing property, casualty, liability, and workers' compensation coverage and
bond and surety arrangements) to which the Fund has been a party, a named
insured, or otherwise the beneficiary of coverage at any time within the past
five years (or such lesser periods as the Fund has actively engaged in business
or owned any material assets): (i) the name, address, and telephone number of
the agent; (ii) the name of the insurer, the name of the policyholder, and the
name of each covered insured; and (iii) the policy number and the period of
coverage. With respect to each current insurance policy, to the Knowledge of
the General Partners and the Fund: (A) the policy is legal, valid, binding,
enforceable, and in full force and effect; (B) the policy will continue to be
legal, valid, binding, enforceable, and in full force and effect on identical
terms following the consummation of the transactions contemplated hereby; (C)
neither the Fund nor any other party to the policy is in breach or default
(including with respect to the payment of premiums or the giving of notices),
and no event has occurred which, with notice or the lapse of time, would
constitute such a breach or default, or permit termination, modification, or
acceleration, under the policy; and (D) no party to the policy has repudiated
any provision thereof. The Fund has been covered during the past five years (or
such lesser periods as the Fund has actively engaged in business or owned any
material assets) by insurance in scope and amount customary and reasonable for
the businesses in which it has engaged during the aforementioned period.
Section 7.18 of the Disclosure Schedule describes any self-insurance
arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the transactions
contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had any
liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do not
materially violate any such laws, ordinances, regulations or orders. The Fund
is not subject to any Liability or claim in connection with any environmental
law or any use, treatment, storage or disposal of any hazardous substance or
material or pollutant or any spill, leakage, discharge or release of any
hazardous substance or material or pollutant as a result of having owned or
operated any business prior to the Effective Time, which if a violation existed
would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $2,082,901 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $208,290 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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<PAGE>
14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
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 III, 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
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<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND IV, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund IV, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly-owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999, and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties on a triple-net
basis, APF has the ability to offer a complete range of restaurant property
services to operators of national and regional restaurant chains, from triple-
net leasing and mortgage financing to site selection, construction management
and build-to-suit development. If APF acquires all of the Income Funds in the
Acquisition, APF expects to have total assets of approximately $1.5 billion at
the time of the consummation of the Acquisition and will be one of the largest
triple-net lease REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 1,334,008 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is uncertain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for trading on
the NYSE. We do not know the value at which an APF Share will trade on the NYSE
upon listing.
S-1
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It is possible that the APF Shares will trade at prices substantially below the
exchange value. APF has, however, recently sold $750 million of APF Shares
through three public offerings. In each offering, the offering price per APF
Share, after giving effect to the one-for-two stock split, equaled the exchange
value. The offering price was determined by APF based upon the estimated costs
of investing in restaurant properties and making mortgage loans, the fees to be
paid to CNL Fund Advisors, Inc. and its affiliates, as well as fees to third
parties and the expenses of the offerings. At March 31, 1999, APF has invested
all of the net offering proceeds to acquire restaurant properties, to make
mortgage loans and to pay fees and other expenses.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the Acquisition?
There are a number of material risks and considerations that you should
consider, including:
. We are uncertain as to the value at which APF Shares will trade following
listing.
. We have material conflicts in light of our being both general partners
of the Income Funds and members of APF's Board of Directors.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. As stated below, the Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote against the
Acquisition.
Did you receive a fairness opinion in connection with APF's acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
with respect to the fairness, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the colored
paper how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's acquisition of your
Income Fund. If you prefer, you may instead vote by telephone, following the
instructions on your consent form. If you sign and send in your consent form
and do not indicate how you want to vote, your consent form will be counted as
a vote "For" the Acquisition. If you do not vote or you abstain from voting, it
will count as a vote "Against" the Acquisition.
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<PAGE>
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2004 in an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only receive the notes option if you vote
"Against" the Acquisition, and you elect to receive notes on your consent form.
You will receive APF Shares if your Income Fund elects to be acquired in the
Acquisition and you vote "For" the Acquisition, or you vote "Against" the
Acquisition and do not affirmatively select the notes option on your consent
form. In addition, if Limited Partners in your Income Fund elect to receive
notes in an amount greater than 15% of the estimated value of APF Shares, based
on the exchange value, to be paid to your Income Fund, then APF has the right
to decline to acquire your Income Fund. The notes will not be listed on any
exchange or automated quotation system, and a market for the notes will not
likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
person subject to income taxation or a tax-paying entity and you receive APF
Shares, the tax that you must pay will generally be based on the difference
between the value of the APF Shares you receive and the tax basis of your
units. If you elect to receive notes, your tax will be based upon your
allocable share of the gain which will be recognized by your Income Fund; your
Income Fund's gain will generally equal the excess, if any, of the value of the
APF Shares received by your Income Fund over the tax basis of your Income
Fund's net assets. Some of the gain may be subject to the 25% rate of tax
applicable to certain types of real property gain.
We urge you to consult with your tax advisor to evaluate the taxes that will be
incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $808. To review
the tax consequences to the Limited Partners of the Income Funds in greater
detail, see pages 180 through 194 of the consent solicitation and "Federal
Income Tax Considerations" in this supplement.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds acquired by
APF may be differently constructed, located in a different geographic area or
of a different restaurant chain than the restaurant properties owned by your
Income Fund. Because the market for real estate may vary from one region of the
country to another, the change in geographic diversity may expose you to
different and greater risks than those to which you are presently exposed. For
geographic information regarding APF's and the Income Funds' restaurant
properties, see "APF's Business and The Restaurant Properties--Business
Objectives and Strategies" and "--The Restaurant Properties--General" and
"Business of the Income Funds--Description of Restaurant Properties" in the
consent solicitation.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund. This description is qualified in its entirety
by the more detailed discussion in the section entitled "Risk Factors"
contained in the consent solicitation.
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<PAGE>
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease below the exchange value upon listing.
Your Income Fund will be receiving 1,334,008 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices substantially below
the exchange value or the historical per share book value of the assets of APF.
The APF Shares have been approved for listing on the NYSE, subject to official
notice of issuance. Prior to listing, the existing APF stockholders have not
had an active trading market in which they could sell their APF Shares.
Additionally, any Limited Partners of the Income Funds who become APF
stockholders as a result of the Acquisition, will have transformed their
investment in non-tradable units into an investment in freely tradable APF
Shares. Consequently, some of these stockholders may choose to sell their APF
Shares upon listing at a time when demand for APF Shares may be relatively low.
The market price of the APF Shares may be volatile after the Acquisition, and
the APF Shares could trade at prices substantially less than the exchange value
as a result of increased selling activity following the issuance of the APF
Shares, the interest level of investors in purchasing the APF Shares after the
Acquisition and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund made $920, $920 and $1,211, respectively, in distributions per $10,000
investment to you. The amount distributed to you in 1998 included a special
distribution of net sales proceeds of $411 per $10,000 investment. While
historically, APF has made distributions equal to 7.625% per APF Share, based
on the exchange value, we cannot be sure that APF will be able to maintain this
level of distributions in the future. In the event that APF is unable to
maintain this level of distributions, your distributions per $10,000 investment
may decrease substantially after the Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have two material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne, have a different interest in the completion of the Acquisition
which may conflict with your interest as a Limited Partner of the Income Fund
or with their own positions as the general partners of your Income Fund.
Second, while we will not receive any APF Shares as a result of APF's
Acquisition of your Income fund, we, as the general partners of your Income
Fund, may be required to pay all or a substantial portion of the Acquisition
costs allocated to your Income Fund to the extent that you or other Limited
Partners of your Income Fund vote against the Acquisition. For additional
information regarding the Acquisition costs allocated to your Income Fund, see
"Comparison of Alternative Effect on Financial Condition and Results of
Operations" contained in this supplement.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own and lease on a triple-net basis, on the date that the Acquisition
is consummated, assuming only your Income Fund was acquired as of March 31,
1999,
S-4
<PAGE>
551 restaurant properties. The risks inherent in investing in an operating
company such as APF include that APF may invest in new restaurant properties
that are not as profitable as APF anticipated, may incur substantial
indebtedness to make future acquisitions of restaurant properties which it may
be unable to repay and may make mortgage loans to prospective operators of
national and regional restaurant chains which may not have the ability to
repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through sale of your APF Shares, not from
liquidation proceeds from restaurant properties. Continuation of your Income
Fund would, on the other hand, permit you eventually to receive liquidation
proceeds, if any, from the sale of the Income Fund's restaurant properties, and
your share of these sale proceeds could be higher than the amount realized from
the sale of your APF Shares or from the payments on any notes if you elect to
receive the notes.
Real Estate/Business Risks
In APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default 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. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
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<PAGE>
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
March 31, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.62x and its ratio of debt-to-total assets was
28.03%. If only your Income Fund were acquired as of that date, APF's debt
service ratio would have been 3.72x and its ratio of debt-to-total assets would
have been 27.32%. Up through the time immediately prior to the consummation of
the Acquisition, as a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former limited partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgages. APF
typically does not require that a third party guarantee the obligations of the
tenant or the borrower. The ability of the tenants or borrowers to pay their
obligations to APF in a timely manner will depend on a number of other factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to: (1)
national, regional and local economic conditions which may be adversely
affected by industry slowdowns, employer relocations, prevailing
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<PAGE>
employment conditions and other factors, and which may reduce consumer demand
for the products offered by APF's customers; (2) local real estate conditions;
(3) changes or weaknesses in specific industry segments; (4) perceptions by
prospective customers of the safety, convenience, services and attractiveness
of the restaurant chain; (5) changes in demographics, consumer tastes and
traffic patterns; (6) the ability to obtain and retain capable management; (7)
changes in laws, building codes, similar ordinances and other legal
requirements, including laws increasing the potential liability for
environmental conditions existing on properties; (8) the inability of a
particular restaurant chain's computer system, or that of its franchisor or
vendors, to adequately address Year 2000 issues; (9) increases in operating
expenses; and (10) increases in minimum wages, taxes, including income,
service, real estate and other taxes, or mandatory employee benefits.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as a stockholder, would be reduced substantially for
each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to certain adjustments that are unique to REITs, a REIT generally
must distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
For a more detailed discussion of the risks associated with the Acquisition,
see "Risk Factors" in the consent solicitation.
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<PAGE>
CONSIDERATION PAID TO INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth information regarding the estimated value of
the consideration that your Income Fund will receive in the Acquisition. The
APF Shares payable to your Income Fund will not change if APF acquires fewer
than all of the Income Funds in the Acquisition. This data assumes that none of
the Limited Partners of your Income Fund have elected to receive notes. You
should note that the APF Shares may trade at prices substantially below the
exchange value upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited
Partner
Original Investments
Limited Less any
Partner Distributions Number of Estimated Value
Investments of Net Sales APF Estimated of APF Shares
Less any Proceeds per Shares Value of APF Estimated Value per Average
Distributions $10,000 Offered to Shares Estimated of APF Shares $10,000 Original
of Net Sales Original Income Payable to Acquisition after Acquisition Limited Partner
Proceeds(1) Investment(1) Fund Income Fund Expenses Expenses Investment
- ------------- ------------- ---------- ------------ ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$28,226,458 $9,409 1,334,008 $26,680,160 $344,000 $26,336,160 $8,779
</TABLE>
- --------
(1) The original Limited Partner investment in the Income Fund was $30,000,000.
These columns reflect, as of March 31, 1999, an adjustment to the Limited
Partners' original investments based on distributions of net sales proceeds
received from sales of restaurant properties (both as a special
distribution and those that were added to working capital and subsequently
distributed).
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2004. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2004. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest. For more detailed information, see "The Acquisition" and
"Description of the Notes" in the consent solicitation.
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EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1)................................................... $ 15,093
Appraisals and Valuation(2)..................................... 6,765
Fairness Opinions(3)............................................ 30,000
Solicitation Fees(4)............................................ 15,941
Printing and Mailing(5)......................................... 104,164
Accounting and Other Fees(6).................................... 31,378
--------
Subtotal...................................................... 203,341
========
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(7)....................... 64,481
Legal Closing Fees(8)........................................... 31,850
Partnership Liquidation Costs(9)................................ 44,328
--------
Subtotal...................................................... 140,659
--------
Total........................................................... $344,000
========
</TABLE>
--------
(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $312,063. Your
Income Fund's pro-rata portion of these fees was determined based
on the percentage of the value of the APF Share consideration
payable to your Income Fund, based on the exchange value, to the
total value of the APF Share consideration payable to all of the
Income Funds, based on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of
the Income Funds in connection with the Acquisition were $105,420.
Your Income Fund's pro-rata portion of these fees was determined
based on number of restaurant properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and
incurred a fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $249,626. Your
Income Fund's pro-rata portion of these fees was determined based
on the number of Limited Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to be
$1,610,399. Your Income Fund's pro-rata portion of these fees was
determined based on the number of Limited Partners in your Income
Fund.
(6) Aggregate accounting and other fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to be
$683,904. Your Income Fund's pro-rata portion of these fees was
determined based on the percentage of your Income Fund's total
assets as of March 31, 1999 to the total assets of all of the
Income Funds as of March 31, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by
all of the Income Funds in connection with the Acquisition is
estimated to be $1,312,808. Your Income Fund's pro-rata portion of
these fees was determined based on the percentage of the value of
the APF Share consideration payable to your Income Fund, based on
the exchange value, to the total value of the APF Share
consideration payable to all of the Income Funds, based on the
exchange value.
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<PAGE>
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,454. Your
Income Fund's pro-rata portion of these fees was determined based
on the percentage of your Income Fund's total assets as of March
31, 1999 to the total assets of all of the Income Funds as of
March 31, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of
the Income Funds in connection with the Acquisition is estimated
to be $895,326. Your Income Fund's pro-rata portion of these costs
was determined based on the percentage of the value of the APF
Share consideration payable to your Income Fund, based on the
exchange value, to the total value of the APF Share consideration
payable to all of the Income Funds, based on the exchange value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 80% or more in value of your Income Fund's
restaurant properties. Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding units.
Consequence of Failure to Approve the Acquisition
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition, the Acquisition may
not be consummated under the terms of the partnership agreement. In such event,
we plan to continue to operate your Income Fund as a going concern and to
eventually dispose of your Income Fund's restaurant properties approximately 7
to 15 years after they were acquired or as soon thereafter if, in our opinion,
market conditions permit, as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at . We
and members of APF's management intend to solicit actively your support for the
Acquisition and would like to use the special meeting to answer questions about
the Acquisition and the solicitation materials and to explain in person our
reasons for recommending that you vote "For" the Acquisition.
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VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain their votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning on attending the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about
, 1999 and will continue until the later of (a) , 1999, a date not less
than 60 calendar days from the initial delivery of the solicitation materials,
or (b) such later date as we may select and as to which we give you notice. At
our discretion, we may elect to extend the solicitation period. Under no
circumstances will the solicitation period be extended beyond March 31, 2000.
Any consent form received by Corporate Election Services prior to 5:00 p.m.,
Eastern time, on the last day of the solicitation period will be effective
provided that such consent form has been properly completed and signed. If you
fail to return a signed consent form by the end of the solicitation period,
your units will be counted as voting "Against" the Acquisition of your Income
Fund and you will receive APF Shares if your Income Fund is acquired. If you
prefer, you may instead vote by telephone according to the instructions on your
consent form.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
S-11
<PAGE>
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the quarter
ended March 31, 1999, the aggregate amounts accrued or paid by your Income Fund
to us are shown below under "Historical Distributions Paid to the General
Partners and Affiliates" and the estimated amounts of compensation that would
have been paid had the Acquisition been in effect for the periods presented,
are shown below under "Pro Forma Distributions to Be Paid to the General
Partners Following the Acquisition":
<TABLE>
<CAPTION>
Year Ended Quarter
December 31, Ended
------------------------ March 31,
1996 1997 1998 1999
------- ------- -------- ---------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the
General Partners and Affiliates:
General Partner Distributions............ -- -- -- --
Accounting and Administrative Services... $85,899 $81,838 $94,365 $26,693
Broker/Dealer Commissions................ -- -- -- --
Due Diligence and Marketing Support
Fees.................................... -- -- -- --
Acquisition Fees......................... -- -- -- --
Asset Management Fees.................... -- -- -- --
Real Estate Disposition Fees(1).......... -- -- 45,663
------- ------- -------- -------
Total historical....................... $85,899 $81,838 $140,028 $26,693
Pro Forma Distributions to Be Paid to the
General Partners Following the
Acquisition:
Cash Distributions on APF Shares......... -- -- -- --
Salary Compensation...................... -- -- -- --
------- ------- -------- -------
Total pro forma........................ -- -- -- --
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to certain minimum
returns to the Limited Partners. To date, no such fees have been paid since
the required minimum returns have not been made to the Limited Partners.
S-12
<PAGE>
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
contained herein under the caption "Financial Statements" and in the consent
solicitation under the caption "Summary--Our Reasons for Supporting the
Acquisition--Prices for Income Fund Units."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31, 1999
-------------------------- --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income..... $763 $730 $775 $568 $ 603 $136 $111
Distributions from Sales of
Properties .................. -- -- -- -- 411 -- --
Distributions from Return of
Capital(1)................... 157 190 145 352 197 64 79
---- ---- ---- ---- ------ ---- ----
Total....................... $920 $920 $920 $920 $1,211 $200 $190
==== ==== ==== ==== ====== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from certain non-cash
items. This amount is not required to be presented as a return of capital
except for purposes of this table, and the Income Fund has not treated this
amount as a return of capital for any other purpose.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses during 1999. Thus, the pro forma information regarding
the distributions to APF stockholders for the quarter ended March 31, 1999 is
not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the Acquisition
with those of several alternatives, the Acquisition is more economically
attractive to you and the other Limited Partners than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
S-13
<PAGE>
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to certain closing conditions. Second, if your Income Fund is acquired
all Limited Partners of your Income Fund who vote against the Acquisition will
be given the option of receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others, that we will be relieved
from certain ongoing liabilities with respect to the Income Fund if it is
acquired by APF. For a further discussion of the conflicts of interest and
potential benefits of the Acquisition to us, see "Conflicts of Interest" below.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the values of the
consideration which would have been received by you and the other Limited
Partners in alternative transactions and concluded that the Acquisition is fair
based on such comparison. In addition, we believe the Acquisition is the best
way to maximize the return on your investment because of your ability to
participate in the potential appreciation of APF Shares. Since the investment
in your Income Fund is an investment in a static portfolio due to the
restrictions contained in your Income Fund's partnership agreement and limited
capital resources, your investments have less of an opportunity to appreciate.
Because APF is a growth-oriented operating company, you will have the
opportunity, as an APF stockholder, to participate in APF's future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinions of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinions of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that each: (1) of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., an affiliate of CNL Group, Inc., and (3) Valuation
Associates has previously performed valuation appraisals for APF. See "Reports,
Opinions and Appraisals" in the consent solicitation.
On rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to, any other
aspect of the Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition or
the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
S-14
<PAGE>
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Legg Mason's opinion also does not compare the relative merits of the
Acquisition with those of any other transaction or business strategy which were
or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares will exceed the going concern value and
liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Net Book Value of the Income Fund. We calculated the book value of your
Income Fund under generally accepted accounting principles, or GAAP, as of
March 31, 1999 per average $10,000 original investment. Since the calculation
of the book value was done on a GAAP basis, it is primarily based on historical
cost and, therefore, it is not indicative of the true fair market value of your
Income Fund. This figure was compared to three other figures:
(1) the value of the Income Fund if it commenced an orderly liquidation of
its investment portfolio on December 31, 1998,
(2) the value of the Income Fund if it continued to operate in accordance
with its existing partnership agreement and business plans, and
(3) the estimated value of the APF Shares, based on the exchange value,
paid to each Income Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated
Original Value of APF
Limited Partner Shares per Average
Investments Less Going $10,000
any Distributions GAAP Book Liquidation Concern Original Limited
of Sales Proceeds(1) Value Value(2) Value(2) Partner Investment
-------------------- --------- ----------- -------- ------------------
<S> <C> <C> <C> <C> <C>
CNL Income Fund IV,
Ltd.................... $9,409 $6,718 $8,102 $8,753 $8,779
</TABLE>
- --------
(1) This column reflects, as of December 31, 1998, an adjustment to the Limited
Partners' original average $10,000 investment based on distributions of net
sales proceeds received from sales of restaurant properties (both as a
special distribution and those that were added to working capital and
subsequently distributed).
(2) Liquidation and going concern values were based on appraisals prepared by
Valuation Associates. For a complete description of the methodologies
employed by Valuation Associates, see "Reports, Opinions and Appraisals" in
the consent solicitation.
S-15
<PAGE>
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have contractual
obligations pursuant to your Income Fund's partnership agreement as well as
state law to assess whether the terms of the Acquisition are fair and equitable
to the Limited Partners of your Income Fund without regard to whether the
Acquisition is fair and equitable to any of the other participants, including
the Limited Partners in other Income Funds. James M. Seneff, Jr. and Robert A.
Bourne act as the individual general partners of all of the Income Funds and
also as members of the Board of Directors of APF. While Messrs. Seneff and
Bourne have sought faithfully to discharge their obligations to your Income
Fund, there is an inherent conflict of interest in serving, directly or
indirectly, in a similar capacity with respect to your Income Fund and also on
APF's Board of Directors.
Lack of Independent Representation
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We have
been the parties responsible for structuring all the terms and conditions of
the Acquisition. Legal counsel engaged to assist with the preparation of the
documentation for the Acquisition, including the consent solicitation, was
engaged by us and did not serve, or purport to serve, as legal counsel for the
Income Funds or Limited Partners. If an independent representative had been
retained for the Income Funds, the terms of the Acquisition may have been
different and possibly more favorable to the Limited Partners. In particular,
had separate representation for each of the Income Funds been arranged by us,
issues unique to the value of each of the specific Income Funds might have been
highlighted or received greater attention, resulting in adjustments to the
value assigned to the assets of such Income Funds and increasing the number of
APF Shares or notes that would be allocable to such Income Fund if acquired in
the Acquisition.
Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive two material benefits. These benefits include:
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr.
Seneff serving as Chairman of APF and Mr. Bourne serving as Vice
Chairman. Furthermore, they will be entitled to receive performance-
based incentives, including stock options under, APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of the Income Funds, we are legally liable for all
of Income Funds liabilities to the extent that the Income Funds are
unable to satisfy such liabilities. Because the partnership agreement
for each Income Fund prohibits the Income Funds from incurring
indebtedness, the only liabilities the Income Funds have are liabilities
with respect to their ongoing business operations. In the event that one
or more Income Funds are acquired by APF, we would be relieved of our
legal obligations to satisfy the liabilities of the acquired Income Fund
or Income Funds.
S-16
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Certain Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund,
regardless of whether any cash is distributed to you. If your Income Fund is
acquired by APF, and you have voted "For" the Acquisition, you will receive APF
Shares. If you have voted "Against" the Acquisition but your Income Fund is
acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under certain circumstances, even
if APF were to make the same level of distributions as your Income Fund, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you. For certain other differences attributable to APF's status as a REIT,
see "--Taxation of APF" and "--Taxation of Stockholders--Taxable Domestic
Stockholders" in the consent solicitation.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain and loss based on the
exchange value, for an average $10,000 original Limited Partner investment in
your Income Fund, is set forth in the table below for those Limited Partners
subject to federal income taxation.
S-17
<PAGE>
<TABLE>
<CAPTION>
Estimated Gain/(Loss)
per Average $10,000 Original
Limited Partner Investment(1)
-----------------------------
<S> <C>
CNL Income Fund IV, Ltd........................... $808
</TABLE>
- --------
(1) Values are based on the exchange value established by APF. Upon listing
the APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be significantly below the exchange value.
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one more individuals or entities in exchange for the stock of that
corporation, and (2) immediately after the exchange, such individuals or
entities are in control of the corporation. For purposes of section 351(a),
control is defined as the ownership of stock possessing at least 80 percent of
the total combined voting power of all classes of stock entitled to vote and
at least 80 percent of the total number of shares of all other classes of
stock of the corporation. APF has represented to Shaw Pittman, APF's tax
counsel, that, following the Acquisition, the Limited Partners of the Income
Funds will not own stock possessing at least 80 percent of the total combined
voting power of all classes of APF stock entitled to vote and at least
80 percent of the total number of shares of all other classes of APF stock.
Based upon this representation, Shaw Pittman has opined that the Acquisition
will not result in the acquisition of control of APF by the Limited Partners
for purposes of section 351(a). Accordingly, the transfer of assets will
result in recognition of gain or loss by each Income Fund that is acquired by
APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if
any, assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner
in your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2004, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by
your Income Fund in the year of the Acquisition will be equal to the value of
the APF Shares received by your Income Fund multiplied by the ratio that the
gross profit realized by your Income Fund in the Acquisition bears to the
total contract price for your Income Fund's assets. To the extent your Income
Fund realizes depreciation recapture income under section 1245 or section 1250
of the Code, the recapture income will also be recognized by your Income Fund
in the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income
Fund's assets over the adjusted tax basis of those assets. The contract price
will equal the selling price reduced by certain qualified indebtedness
encumbering your Income Fund's assets, if any, that is assumed or taken
subject to by the Operating Partnership. The exact amount of the gain to be
recognized by your Income Fund in the year of the Acquisition will also vary
depending upon the decisions of the Limited Partners to receive APF Shares
or notes.
In general, gains or losses realized with respect to transfers of non-
dealer real estate and equipment in the Acquisition are likely to be treated
as realized from the sale of a "section 1231 asset," which is real property or
a depreciable asset used in a trade or business and held for more than one
year. Your share of gains or losses from the sale of section 1231 assets of
your Income Fund would be combined with any other section 1231 gains and
losses that you recognize in that year. If the result is a net loss, such loss
is characterized as an
S-18
<PAGE>
ordinary loss. If the result is a net gain, it is characterized as a capital
gain, except that the gain will be treated as ordinary income to the extent
that you have "non-recaptured section 1231 losses." For these purposes, the
term "non-recaptured section 1231 losses" means your aggregate section 1231
losses for the five most recent prior years that have not been previously
recaptured. However, gain recognized on the sale of personal property will be
taxed as ordinary income to the extent of all prior depreciation deductions
taken by your Income Fund prior to sale. In general, you may only use up to
$3,000 of capital losses in excess of capital gains to offset ordinary income
in any taxable year. Any excess loss is carried forward to future years subject
to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the notes may recognize gain in the year of the
Acquisition despite the fact that they will not receive cash with which to pay
the tax on the gain. Such Limited Partners will adjust the basis of the notes
as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive the notes. See "--Tax Consequences of Liquidation
and Termination of Your Income Fund" below.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
been liquidated and distributed APF Shares or notes, as the case may be, to
you. The taxable year of your Income Fund will end at this time, and you must
report, in your taxable year that includes the date of the Acquisition, your
share of all income, gain, loss, deduction and credit for your Income Fund
through the date of the Acquisition, including gain or loss resulting from the
Acquisition. If your taxable year is not the calendar year, you could be
required to recognize as income in a single taxable year your share of your
Income Fund's income attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units, and your holding period
for the notes for purposes of determining capital gain or loss from the
disposition of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17) or
(20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The
S-19
<PAGE>
basis of the restaurant properties received by APF from the Income Funds will
equal the fair market value of the APF Shares, plus the issue price of the
notes issued in the Acquisition, plus the amount of any liabilities of the
Income Funds assumed by APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
For a discussion of the taxation of APF, see "Federal Income Tax
Considerations--Taxation of APF" in the consent solicitation.
S-20
<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 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 2,307,364 1,391,466 8,137 (2,450,663)(b),(c)
Interest and
Other Income..... 2,214,763 0 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 0 1,095,269 2,563,714 1,323,577 64,186 (377,734)(e)
Management and
Advisory Fees.... 697,364 0 697,364 0 0 611,196 (1,308,560)(f)
Fees to Related
Parties.......... 0 0 0 23,326 292,575 0 (292,786)(g)
Interest
Expense.......... 0 0 0 50,730 0 4,769,268 0
State Taxes...... 235,208 0 235,208 0 0 0 0
Depreciation--
Other............ 0 0 0 39,581 26,238 0 0
Depreciation--
Property......... 1,548,813 349,465(a) 1,898,278 0 0 0 0
Amortization..... 7,368 0 7,368 0 0 0 539,335 (h)
Transaction
Costs............ 125,926 0 125,926 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
Total Expenses.. 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650 (1,439,745)
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) $ (948,850)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 0 17,271 0 0 0 0
Gain on Sale of
Properties....... 0 0 0 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 (215,797) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
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) (948,850)
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) $(1,197,529)
=========== ========== =========== ========== ========== ========== ===========
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund IV, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $14,523,161 $ 535,902 $ 5,072 (j) $15,064,135
Fees............. 1,256,304 0 (14,530)(k) 1,241,774
Interest and
Other Income..... 7,687,325 9,918 0 7,697,243
------------ ---------- ------------------ ------------
Total Revenue... $23,466,790 $545,820 $ (9,458) $24,003,152
Expenses:
General and
Administrative... 4,669,012 55,717 ( 31,892)(l),(m) 4,692,837
Management and
Advisory Fees.... 0 0 0 (n) 0
Fees to Related
Parties.......... 23,115 0 0 23,115
Interest
Expense.......... 4,819,998 0 0 4,819,998
State Taxes...... 235,208 15,395 5,441 (o) 256,044
Depreciation--
Other............ 65,819 0 0 65,819
Depreciation--
Property......... 1,898,278 101,372 51,346 (p) 2,050,996
Amortization..... 546,703 1,159 0 547,862
Transaction
Costs............ 125,926 33,018 0 158,944
------------ ---------- ------------------ ------------
Total Expenses.. 12,384,059 206,661 24,895 12,615,615
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties and
Provision for
Losses on
Properties....... $11,082,731 $ 339,159 $ (34,353) $11,387,537
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 73,674 (9,784)(q) 81,161
Gain on Sale of
Properties....... 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 0 (215,797)
------------ ---------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/
(Provision) for
Federal Income
Taxes............ 10,884,205 412,833 (44,137) 11,252,901
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ---------- ------------------ ------------
Net
Earnings(Losses).. $10,884,205 $ 412,833 $ (44,137) $11,252,901
============ ========== ================== ============
</TABLE>
S-21
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
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
============ =========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 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
============ =========== ============ ========== ========== ============ ===========
Weighted average
units
outstanding
during period... n/a n/a n/a n/a n/a n/a n/a
============ =========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,401 n/a 37,347,401 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 n/a 37,348,464 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... 14,237,405 n/a n/a n/a n/a n/a n/a
Cash
distributions
declared per
$10,000
Investment...... 191 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 $ -- $ -- $ -- $ 0
Mortgages/notes
receivable...... $ 41,269,740 0 $ 41,269,740 $ -- $ -- $247,896,287 $ 0
Receivables,
net............. $ 548,862 0 $ 548,862 $7,141,967 $5,457,493 $ 1,969,339 (148,629)(w)
Investment
in/due from
joint ventures.. $ 1,083,564 0 $ 1,083,564 $ -- $ -- $ -- 0
Total assets.... $708,694,145 $33,656,518(u) $742,350,663 $8,223,820 $6,308,406 $264,700,433 $31,410,052 (v1),(w)
Total
liabilities/minority
interest........ $ 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 $31,830,422 (vl),(x)
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund Pro Forma Adjusted
APF IV, Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- ------------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 542 38 n/a 580
============== =========== ==================== ==================
Earnings per
share/unit...... $ n/a 6.88 $ n/a $ 0.25
============== =========== ==================== ==================
Book value per
share/unit...... $ n/a $ 335.88 $ n/a $ 16.34
============== =========== ==================== ==================
Dividends per
share/unit...... $ n/a $ 10.00 $ n/a $ n/a
============== =========== ==================== ==================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 3.20x
============== =========== ==================== ==================
Weighted average
units
outstanding
during period... n/a 60,000 n/a n/a
============== =========== ==================== ==================
Weighted average
shares
outstanding
during period... 43,497,401 n/a 1,316,808 44,814,209 (r)
============== =========== ==================== ==================
Shares
outstanding..... 43,498,464 n/a 1,316,808 44,615,272
============== =========== ==================== ==================
Cash
distributions
declared:....... n/a 600,000 n/a $ 19,448,759 (s)
==================
Cash
distributions
declared per
$10,000
Investment...... n/a 10 n/a $ 217 (t)
==================
Balance sheet
data:
Real estate
assets, net..... $ 647,547,023 $16,606,471 $7,679,851 (v2) $ 671,833,345
Mortgages/notes
receivable...... $ 289,166,027 $ -- $ 0 $ 289,166,027
Receivables,
net............. $ 14,969,032 $ 36,107 $ (145,312)(y) $ 14,859,827
Investment
in/due from
joint ventures.. $ 1,083,564 $ 3,388,240 $1,081,962 (v2) $ 5,553,766
Total assets.... $1,052,993,374 $21,046,527 $6,038,017 (v2),(y) $1,080,077,918
Total
liabilities/minority
interest........ 346,929,801 $ 893,694 $ (145,312)(y) $ 347,678,183
Total equity.... $ 706,063,573 $20,152,833 $6,183,329 (v2) $ 732,399,735
</TABLE>
S-22
<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
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<CAPTION>
<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 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
</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>
<CAPTION>
<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>
(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)
<TABLE>
<S> <C>
Amortization of goodwill $539,335
</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 $5,072 in accrued rental income resulting from the straight-
lining of scheduled rent increases throughout the lease terms for the
leases acquired from the Income Fund as if the leases had been acquired
on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<CAPTION>
<S> <C>
Management fees $ 0
Reimbursement of administrative costs (14,530)
---------
$(14,530)
=========
</TABLE>
S-23
<PAGE>
(l) Represents the elimination of $14,530 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $17,362 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports
for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income Fund
to the Advisor.
(o) Represents additional state income taxes of $5,441 resulting from
assuming that acquisitions of properties that had been operational when
APF acquired them from January 1, 1999 through May 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 Fund 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 $51,346 as a result
of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated using
the straight-line method over the remaining useful lives of the
properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $9,784
as a result of adjusting the historical basis of the real estate owned
by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings owned indirectly by the
Income Fund is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(r) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 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 Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Income Fund Total
----------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Shares Offered 3,800,000 2,350,000 1,316,808.10 7,466,808.10
Exchange Value $20 $20 $20 $20
----------- ----------- ------------ ------------
Share Consideration $76,000,000 $47,000,000 $ 26,336,162 $149,336,162
Cash Consideration -- -- 344,000 344,000
APF Transaction Costs 5,434,441 3,360,773 1,907,786 10,703,000
----------- ----------- ------------ ------------
Total Purchase Price $81,434,441 $50,360,773 $ 28,587,948 $160,383,162
=========== =========== ============ ============
Allocation of Purchase
Price:
----------------------
Net Assets --
Historical $ 7,141,252 $10,006,878 $ 20,152,833 $ 37,300,963
Purchase Price
Adjustments:
Land and buildings on
operating leases 6,118,683 6,118,683
Net investment in
direct financing
leases 1,561,168 1,561,168
Investment in joint
ventures 1,081,962 1,081,962
Accrued rental income (285,013) (285,013)
Intangibles and other
assets (2,792,876) (41,685) (2,834,561)
Goodwill* 43,146,771 -- 43,146,771
Excess purchase price 74,293,189 -- -- 74,293,189
----------- ----------- ------------ ------------
Total Allocation $81,434,441 $50,360,773 $ 28,587,948 $160,383,162
=========== =========== ============ ============
</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 pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $74,293,189 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
S-24
<PAGE>
Combinations". Goodwill of $43,146,771 relating to the acquisition of the
CNL Financial Services Group is being amortized over 20 years. APF did not
acquire any intangibles as part of any of the acquisitions. The entries
were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1. Common Stock (CFA, CFS, CFC)--Class A 8,600
Common Stock (CFA, CFS, CFC)--Class B 4,825
APIC (CFA, CFS, CFC) 13,857,645
Retained Earnings 3,277,060
Accumulated distributions in excess of earnings 74,293,189
Goodwill for CFC (Intangibles and other assets) 43,146,771
CFC/CFS Org Costs/Other Assets 2,792,876
Cash to pay APF transaction costs 8,795,214
APF Common Stock 61,500
APF APIC 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital 20,152,833
Land and buildings on operating leases 6,118,683
Net investment in direct financing leases 1,561,168
Investment in joint ventures 1,081,962
Accrued rental income 285,013
Intangibles and other assets 41,685
Cash to pay APF Transaction costs 1,907,786
Cash consideration to Income Funds 344,000
APF Common Stock 13,168
APF APIC 26,322,994
(To record acquisition of Income Fund)
</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 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.
(y) Represents the elimination by the Income Fund of $145,312 in related
party payables recorded as receivables by the Advisor.
S-25
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND IV, LTD.
The following table sets forth certain financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
IV, Ltd." in this supplement.
<TABLE>
<CAPTION>
Quarter Ended
March 31, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 619,494 $ 648,565 $ 2,285,696 $ 2,531,385 $ 2,820,295 $ 2,871,572 $ 2,865,770
Net income (2).......... 412,833 577,060 1,821,449 1,720,668 2,347,167 2,210,339 2,310,524
Cash distributions
declared (3)........... 600,000 1,833,748 3,633,748 2,760,000 2,760,000 2,760,000 2,760,000
Net income per Unit
(2).................... 6.81 9.58 30.15 28.42 38.75 36.48 38.13
Cash distributions
declared per
Unit (3)............... 10.00 30.56 60.56 46.00 46.00 46.00 46.00
GAAP book value per
unit................... 335.88 348.26 339.00 369.20 381.63 388.14 397.30
Weighted average number
of Limited Partner
Units outstanding...... 60,000 60,000 60,000 60,000 60,000 60,000 60,000
<CAPTION>
March 31, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $21,046,527 $22,996,043 $21,189,833 $23,309,888 $23,730,892 $24,057,829 $24,598,179
Total partners'
capital................ 20,152,833 20,895,611 20,340,000 22,152,299 22,897,631 23,288,164 23,837,825
</TABLE>
- --------
(1) Revenues include equity in earnings of joint ventures.
(2) Net income for the year ended December 31, 1997, includes $6,652 from a
loss on the sale of land and $70,337 for a provision for loss on land and
building. Net income for the quarter ended March 31, 1998 and for years
ended December 31, 1998, 1996, 1995 and 1994 includes $120,915, $226,024,
$221,390, $128,547 and $128,592, respectively, from gains on the sale of
land and buildings.
(3) Distributions for quarter ended March 31, 1998, and the year ended December
31, 1998, include a special distribution to the Limited Partners of
$1,233,748 in net sales proceeds from the sales of two restaurant
properties in 1998.
S-26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND IV, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
November 18, 1987, to acquire for cash, either directly or through joint
venture arrangements, both newly constructed and existing restaurant
properties, as well as land upon which restaurants were to be constructed,
which are leased primarily to operators of national and regional fast-food and
family-style restaurant chains. The leases generally are triple-net leases,
with the lessees responsible for all repairs and maintenance, property taxes,
insurance and utilities. As of 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,
S-27
<PAGE>
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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<PAGE>
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
S-29
<PAGE>
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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<PAGE>
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.
S-31
<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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.
S-35
<PAGE>
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
S-36
<PAGE>
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.
S-37
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998....... F-1
Condensed Statements of Income for the Quarters and Quarters Ended March
31, 1999 and 1998........................................................ F-2
Condensed Statements of Partner's Capital for the Quarters Ended March 31,
1999 and for the Year Ended December 31, 1998............................ F-3
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998................................................................. F-4
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998............................................................ F-5
Report of Independent Accountants......................................... F-7
Balance Sheets as of December 31, 1998 and 1997........................... F-8
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-9
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996............................................................ F-10
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................. F-12
Unaudited Pro Forma Financial Information................................. F-21
Unaudited Pro Forma Balance Sheet as of March 31, 1999.................... F-22
Unaudited Pro Forma Statement of Earnings for the Quarter Ended March 31,
1999..................................................................... F-24
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998..................................................................... F-26
Unaudited Pro Forma Statement of Cash Flows for the Quarter Ended March
31, 1999................................................................. F-28
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................. F-30
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-32
</TABLE>
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December
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-1
<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-2
<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-3
<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-4
<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-5
<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-6
<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-7
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building.................................... $15,486,459 $18,097,997
Net investment in direct financing leases............. 1,231,482 1,269,389
Investment in joint ventures.......................... 2,862,906 2,708,012
Cash and cash equivalents............................. 739,382 876,452
Restricted cash....................................... 537,274 --
Receivables, less allowance for doubtful accounts of
$258,641 and $295,580................................ 24,676 37,669
Prepaid expenses...................................... 9,836 11,115
Lease costs, less accumulated amortization of $21,450
and $17,956.......................................... 18,094 21,588
Accrued rental income................................. 279,724 287,466
Other assets.......................................... -- 200
----------- -----------
$21,189,833 $23,309,888
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 4,503 $ 8,576
Accrued construction costs payable.................... -- 250,000
Accrued and escrowed real estate taxes payable........ 36,732 65,176
Distributions payable................................. 600,000 690,000
Due to related parties................................ 148,978 93,854
Rents paid in advance and deposits.................... 59,620 49,983
----------- -----------
Total liabilities................................... 849,833 1,157,589
Partners' capital..................................... 20,340,000 22,152,299
----------- -----------
$21,189,833 $23,309,888
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases....... $2,104,520 $2,058,703 $2,263,677
Earned income from direct financing
leases................................... 126,993 130,683 134,014
Contingent rental income.................. 83,377 117,031 97,318
Interest and other income................. 60,950 35,221 47,855
---------- ---------- ----------
2,375,840 2,341,638 2,542,864
---------- ---------- ----------
Expenses:
General operating and administrative...... 151,775 149,808 161,714
Professional services..................... 43,609 33,439 29,289
Bad debt expense.......................... -- 12,794 --
Real estate taxes......................... 31,879 65,316 37,589
State and other taxes..................... 15,747 16,476 21,694
Depreciation and amortization............. 428,975 455,895 444,232
Transaction costs........................... 18,286 -- --
---------- ---------- ----------
690,271 733,728 694,518
---------- ---------- ----------
Income Before Equity in Earnings (Losses) of
Joint Ventures, Gain (Loss) on Sale of Land
and Buildings and Provision for Loss on
Land and Building.......................... 1,685,569 1,607,910 1,848,346
Equity in Earnings (Losses) of Joint
Ventures................................... (90,144) 189,747 277,431
Gain (Loss) on Sale of Land and Buildings... 226,024 (6,652) 221,390
Provision for Loss on Land and Building..... -- (70,337) --
---------- ---------- ----------
Net Income.................................. $1,821,449 $1,720,668 $2,347,167
========== ========== ==========
Allocation of Net Income:
General partners.......................... $ 12,724 $ 15,697 $ 22,219
Limited partners.......................... 1,808,725 1,704,971 2,324,948
---------- ---------- ----------
$1,821,449 $1,720,668 $2,347,167
========== ========== ==========
Net Income Per Limited Partner Unit......... $ 30.15 $ 28.42 $ 38.75
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding.......................... 60,000 60,000 60,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $241,504 $160,634 $30,000,000 $(19,687,963) $16,013,989 $(3,440,000) $23,288,164
Contributions from
general partners...... 22,300 -- -- -- -- -- 22,300
Distributions to
limited partners ($46
per limited partner
unit)................. -- -- -- (2,760,000) -- -- (2,760,000)
Net income............. -- 22,219 -- -- 2,324,948 -- 2,347,167
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 263,804 182,853 30,000,000 (22,447,963) 18,338,937 (3,440,000) 22,897,631
Contributions from
general partners...... 294,000 -- -- -- -- -- 294,000
Distributions to
limited partners ($46
per limited partner
unit)................. -- -- -- (2,760,000) -- -- (2,760,000)
Net income............. -- 15,697 -- -- 1,704,971 -- 1,720,668
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 557,804 198,550 30,000,000 (25,207,963) 20,043,908 (3,440,000) 22,152,299
Distributions to
limited partners ($61
per limited partner
unit)................. -- -- -- (3,633,748) -- -- (3,633,748)
Net income............. -- 12,724 -- -- 1,808,725 -- 1,821,449
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $557,804 $211,274 $30,000,000 $(28,841,711) $21,852,633 $(3,440,000) $20,340,000
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............. $ 2,351,732 $ 2,345,612 $ 2,588,248
Distributions from joint ventures...... 248,360 265,473 305,866
Cash paid for expenses................. (274,436) (211,213) (206,059)
Interest received...................... 36,664 18,100 25,909
----------- ----------- -----------
Net cash provided by operating
activities.......................... 2,362,320 2,417,972 2,713,964
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
building.............................. 2,526,354 378,149 1,049,550
Additions to land and buildings on
operating leases...................... (275,000) -- (1,035,516)
Investment in joint ventures........... (493,398) -- (437,489)
Decrease (increase) in restricted
cash.................................. (533,598) -- 518,150
Payment of lease costs................. -- (17,384) (2,230)
Other.................................. -- 9,122 --
----------- ----------- -----------
Net cash provided by investing
activities.......................... 1,224,358 369,887 92,465
----------- ----------- -----------
Cash Flows from Financing Activities:
Contributions from general partners.... -- 294,000 22,300
Distributions to limited partners...... (3,723,748) (2,760,000) (2,760,000)
----------- ----------- -----------
Net cash used in financing
activities.......................... (3,723,748) (2,466,000) (2,737,700)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ (137,070) 321,859 68,729
Cash and Cash Equivalents at Beginning
of Year................................ 876,452 554,593 485,864
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 739,382 $ 876,452 $ 554,593
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 1,821,449 $ 1,720,668 $ 2,347,167
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 425,481 453,397 442,065
Amortization........................... 3,494 2,498 2,167
Equity in earnings of joint ventures,
net of distributions.................. 338,504 75,726 28,435
Bad debt expense....................... -- 12,794 --
Loss (gain) on sale of land and
buildings............................. (226,024) 6,652 (221,390)
Provision for loss on land and
building.............................. -- 70,337 --
Decrease in receivables................ 8,607 5,422 41,531
Decrease (increase) in prepaid
expenses.............................. 1,279 (180) (1,202)
Decrease in net investment in direct
financing leases...................... 37,907 34,215 30,885
Increase in accrued rental income...... (40,515) (39,669) (21,520)
Increase (decrease) in accounts
payable and accrued expenses.......... (26,960) 31,976 11,162
Increase in due to related parties..... 9,461 26,701 39,987
Increase in rents paid in advance and
deposits.............................. 9,637 17,435 14,677
----------- ----------- -----------
Total adjustments.................... 540,871 697,304 366,797
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 2,362,320 $ 2,417,972 $ 2,713,964
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Deferred real estate disposition fees
incurred and unpaid at December 31.... $ 45,663 $ -- $ --
=========== =========== ===========
Distributions declared and unpaid at
December 31........................... $ 600,000 $ 690,000 $ 690,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund IV, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to their fair
value. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
best estimate of net cash flows expected to be generated from its properties
and the need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership
F-12
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
continues to pursue collection of such amounts. If amounts are subsequently
determined to be uncollectible, the corresponding receivable and allowance for
doubtful accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership's investments in Holland Joint
Venture, Titusville Joint Venture, Cocoa Joint Venture, Auburn Joint Venture,
Kingsville Real Estate Joint Venture, Warren Joint Venture, and a property in
Clinton, North Carolina, held as tenants-in-common, are accounted for using the
equity method since the Partnership shares control with affiliates which have
the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Lease Costs--Brokerage fees associated with negotiating new leases are
amortized over the terms of the new leases using the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
2. Leases:
The Partnership leases its land or land and buildings primarily to operators
of national and regional fast-food and family-style restaurants. The leases are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 13, "Accounting for Leases." The leases generally are classified
as operating leases; however, some leases have been classified as direct
financing leases. For the leases classified as direct financing leases, the
building portions of the property leases are accounted for as direct financing
leases while the land portion of one of these leases is an operating lease.
Substantially all leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant generally pays all property taxes
and assessments,
F-13
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
fully maintains the interior and exterior of the building and carries insurance
coverage for public liability, property damage, fire and extended coverage. The
lease options generally allow tenants to renew the leases for two or four
successive five-year periods subject to the same terms and conditions as the
initial lease. Most leases also allow the tenant to purchase the property at
fair market value after a specified portion of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................... $ 7,244,512 $ 8,328,572
Buildings.......................................... 11,986,556 13,684,194
----------- -----------
19,231,068 22,012,766
Less accumulated depreciation...................... (3,744,609) (3,844,432)
----------- -----------
15,486,459 18,168,334
Less allowance for loss on land and building....... -- (70,337)
----------- -----------
$15,486,459 $18,097,997
=========== ===========
</TABLE>
In July 1997, the Partnership entered into new leases for the properties in
Portland and Winchester, Indiana, with a new tenant to operate the properties
as Arby's restaurants. In connection therewith, the Partnership incurred
$125,000 in renovation costs for each property.
In November 1997, the Partnership sold its property in Douglasville, Georgia
to an unrelated third party for $402,000 and received net sales proceeds of
$378,149 (net of $2,546 which represents amounts due to the former tenant for
prorated rent). This property was originally acquired by the Partnership in
December 1994 and had a cost of approximately $363,800, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the Partnership sold
the property for approximately $16,900 in excess of its original purchase
price. Due to the fact that the Partnership had recognized accrued rental
income since the inception of the lease relating to the straight-lining of
future scheduled rent increases in accordance with generally accepted
accounting principles, the Partnership wrote off the cumulative balance of such
accrued rental income at the time of the sale of this property, resulting in a
loss of $6,652 for financial reporting purposes. Due to the fact that the
straight-lining of future rent increases over the term of the lease is a non-
cash accounting adjustment, the write off of these amounts is a loss for
financial statement purposes only.
In March 1998, the Partnership sold its property in Fort Myers, Florida, to
a third party for $842,100 and received net sales proceeds of $794,690,
resulting in a gain of $225,902 for financial reporting purposes. This property
was originally acquired by the Partnership in December 1988 and had a cost of
approximately $598,000 excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold the Property for approximately
$196,700 in excess of its original purchase price.
In March 1998, the Partnership sold its property in Union Township, Ohio to
a third party for $680,000 and received net sales proceeds of $674,135,
resulting in a loss of $104,987 for financial reporting purposes.
In connection with the sale of the properties described above, the
Partnership incurred deferred, subordinated, real estate disposition fees of
$45,663 (see Note 10).
In July 1998, the Partnership sold its property in Leesburg, Florida, for
$565,000 and received net sales proceeds of $523,931, resulting in a loss for
financial reporting purposes of $135,509. Due to the fact that at
F-14
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
December 31, 1997, the Partnership had recorded a provision for loss on land
and building in the amount of $70,337 for this property, the Partnership
recognized the remaining loss of $65,172 for financial reporting purposes in
July 1998, relating to the sale.
In September 1998, the Partnership sold its property in Naples, Florida, to
a third party for $563,000 and received net sales proceeds of $533,598,
resulting in a gain of $170,281 for financial reporting purposes. This property
was originally acquired by the Partnership in December 1988 and had a cost of
approximately $410,500 excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold the property for approximately
$123,100 in excess of its original purchase price.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998, 1997, and 1996, the Partnership recognized $40,515, $39,669 and
$21,520, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,975,839
2000............................................................. 1,977,929
2001............................................................. 1,947,479
2002............................................................. 1,951,578
2003............................................................. 1,759,818
Thereafter....................................................... 10,670,163
-----------
$20,282,806
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Minimum lease payments receivable................... $1,660,791 $ 1,825,690
Estimated residual values........................... 527,829 527,829
Less unearned income................................ (957,138) (1,084,130)
---------- -----------
Net investment in direct financing leases........... $1,231,482 $ 1,269,389
========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999.............................................................. $ 164,899
2000.............................................................. 164,899
2001.............................................................. 164,899
2002.............................................................. 164,899
2003.............................................................. 164,899
Thereafter........................................................ 836,296
----------
$1,660,791
==========
</TABLE>
F-15
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future
periods (see Note 3).
5. Investment in Joint Ventures:
As of December 31, 1997, the Partnership had a 51 percent, a 26.6%, a 57
percent, a 96.1% and a 68.87% interest in the profits and losses of Holland
Joint Venture, Titusville Joint Venture, Cocoa Joint Venture, Auburn Joint
Venture and Kingsville Real Estate Joint Venture, respectively, and a 53
percent interest in the profits and losses of a property in Clinton, North
Carolina, held as tenants-in-common with affiliates of the general partners.
The remaining interests in these joint ventures are held by affiliates of
the Partnership which have the same general partners. Holland Joint Venture,
Titusville Joint Venture, Cocoa Joint Venture, Auburn Joint Venture,
Kingsville Real Estate Joint Venture and the Partnership and affiliates, as
tenants-in-common, each own and lease one property to an operator of national
fast-food or family-style restaurants.
In September 1998, the Partnership entered into a joint venture
arrangement, Warren Joint Venture, with an affiliate of the general partners,
to hold one restaurant property. As of December 31, 1998, the Partnership had
acquired a 35.71% interest in the profits and losses of the joint venture. The
Partnership accounts for its investment in this joint venture under the equity
method since the Partnership shares control with the affiliates.
The following presents the joint ventures' combined, condensed financial
information at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss
on land and building............................. $4,406,943 $3,338,372
Net investment in direct financing leases less
allowance for loss on building................... 626,594 842,633
Cash.............................................. 14,025 12,331
Receivables....................................... 10,943 40,456
Accrued rental income............................. 163,773 177,567
Other assets...................................... 2,513 2,029
Liabilities....................................... 27,211 16,283
Partners' capital................................. 5,197,580 4,397,105
Revenues.......................................... 368,058 434,177
Provision for loss on land and buildings and net
investment in direct financing lease............. (441,364) (147,039)
Net income........................................ (212,388) 126,271
</TABLE>
The Partnership recognized a loss totalling $90,144 and income totalling
$189,747 and $277,431 for the years ended December 31, 1998, 1997, and 1996,
respectively, from these joint ventures.
6. Restricted Cash:
As of December 31, 1998, the net sales proceeds of $533,598 from the sale
of the property in Naples, Florida, plus accrued interest of $3,676 were being
held in an interest-bearing escrow account pending the release of funds by the
escrow agent to acquire an additional property on behalf of the Partnership.
F-16
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
7. Receivables:
In June 1997, the Partnership terminated the leases with the tenant of the
properties in Portland and Winchester, Indiana. In connection therewith, the
Partnership accepted a promissory note from the former tenant for $32,343 for
amounts relating to past due real estate taxes the Partnership had accrued as a
result of the former tenant's financial difficulties. The promissory note,
which is uncollateralized, bears interest at a rate of ten percent per annum,
and is being collected in 36 monthly installments. As of December 31, 1998, the
Partnership had collected the full amount of the promissory note.
8. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of property, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their 10%
Preferred Return, plus the return of their adjusted capital contributions. The
general partners will then receive, to the extent previously subordinated and
unpaid, a one percent interest in all prior distributions of net cash flow and
a return of their capital contributions. Any remaining sales proceeds will be
distributed 95 percent to the limited partners and five percent to the general
partners. Any gain from the sale of a property not in liquidation of the
Partnership is, in general, allocated in the same manner as net sales proceeds
are distributable. Any loss from the sale of a property not in liquidation of
the Partnership is, in general, allocated first, on a pro rata basis, to
partners with positive balances in their capital accounts; and thereafter, 95
percent to the limited partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During each of the years ended December 31, 1998, 1997, and 1996, the
Partnership declared distributions to the limited partners of $3,633,748,
$2,760,000, and $2,760,000, respectively. Distributions for the year ended
December 31, 1998 included $1,233,748 as a result of the distribution of net
sales proceeds from the sale of the properties in Fort Myers, Florida and Union
Township, Ohio. This amount was applied toward the limited partners' 10%
Preferred Return. No distributions have been made to the general partners to
date.
F-17
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
9. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $1,821,449 $1,720,668 $2,347,167
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (8,014) (9,203) (17,764)
Allowance for loss on land and
building............................... -- 70,337 --
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 37,907 34,215 30,885
Gain on sale of land and buildings for
financial reporting purposes less than
(in excess of) gain for tax reporting
purposes............................... (231,919) 44,918 (140,228)
Capitalization of transaction costs for
tax reporting purposes................. 18,286 -- --
Equity in earnings of joint ventures for
financial reporting purposes less than
(in excess of) equity in earnings of
joint ventures for tax reporting
purposes............................... 319,186 51,115 (25,853)
Allowance for doubtful accounts......... (36,939) 138,647 (9,933)
Accrued rental income................... (40,515) (39,669) (21,520)
Rents paid in advance................... 9,137 7,435 14,677
Other................................... 501 -- --
---------- ---------- ----------
Net income for federal income tax
purposes............................... $1,889,079 $2,018,463 $2,177,431
========== ========== ==========
</TABLE>
10. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director, and vice chairman of the Board of CNL Fund Advisors,
Inc. During the years ended December 31, 1998, 1997, and 1996, CNL Fund
Advisors, Inc. (hereinafter referred to collectively as the "Affiliate")
performed certain services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate an annual, noncumulative, subordinated management fee of
one percent of the sum of gross revenues from properties wholly owned by the
Partnership and the Partnership's allocable share of gross revenues from joint
ventures, but not in excess of competitive fees for comparable services. These
fees will be incurred and will be payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners have not received their 10% Preferred
Return in any particular year, no management fees will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1998, 1997, and 1996.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the
F-18
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
sale. However, if the net sales proceeds are reinvested in a replacement
property, no such real estate disposition fees will be incurred until such
replacement property is sold and the net sales proceeds are distributed. The
payment of the real estate disposition fee is subordinated to receipt by the
limited partners of their aggregate 10% Preferred Return, plus their adjusted
capital contributions. For the year ended December 31, 1998, the Partnership
incurred $45,663 in deferred, subordinated, real estate disposition fees as a
result of the sales of properties. No deferred, subordinated real estate
disposition fees were incurred for the years ended December 31, 1997 and 1996.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $94,365, $81,838 and $85,899 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Due to the Affiliate:
Expenditures incurred on behalf of the Partnership........ $ 53,363 $48,126
Accounting and administrative services.................... 49,952 40,728
Deferred, subordinated real estate disposition fee........ 45,663 --
Other....................................................... -- 5,000
-------- -------
$148,978 $93,854
======== =======
</TABLE>
11. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from joint ventures), for each of the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Shoney's, Inc..................................... $413,755 $427,238 $425,390
Tampa Foods, L.P.................................. N/A N/A 291,347
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from joint ventures) for each of the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Shoney's......................................... $541,175 $557,303 $557,841
Wendy's Old Fashioned Hamburger Restaurants...... 437,896 432,585 499,305
Denny's.......................................... N/A 345,749 360,080
Taco Bell........................................ N/A 262,909 251,314
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership.
F-19
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
12. Subsequent Events:
In January 1999, the Partnership used the net sales proceeds from the sale
of the property in Naples, Florida to invest in a Property in Zephyrhills,
Florida, with an affiliate of the general partners as tenants-in-common for a
76 percent interest in the property. The Partnership will account for its
investment in this property using the equity method since the Partnership will
share control with affiliates. On March 11, 1999, the Partnership entered into
an Agreement and Plan of Merger with CNL American Properties Fund, Inc.
("APF"), pursuant to which the Partnership would be merged with and into a
subsidiary of APF (the "Merger"). As consideration for the Merger, APF has
agreed to issue 2,668,016 shares of its common stock, par value $0.01 per
shares (the "APF Shares") which, for the purposes of valuing the merger
consideration, have been valued by APF at $10.00 per APF Share, the price paid
by APF investors in APF's most recent public offering. In order to assist the
general partners in evaluating the proposed merger consideration, the general
partners retained Valuation Associates, a nationally recognized real estate
appraisal firm, to appraise the Partnership's restaurant property portfolio.
Based on Valuation Associates' appraisal, the Partnership's property portfolio
and other assets were valued on a going concern basis (meaning the Partnership
continues unchanged) at $26,259,630 as of December 31, 1998. The APF Shares are
expected to be listed for trading on the New York Stock Exchange concurrently
with the consummation of the Merger, and, therefore, would be freely tradable
at the option of the former limited partners. At a special meeting of the
partners that is expected to be held in the third quarter of 1999, limited
partners holding in excess of 50% of the Partnership's outstanding limited
partnership interests must approve the Merger prior to consummation of the
transaction. The general partners intend to recommend that the limited partners
of the Partnership approve the Merger. In connection with their recommendation,
the general partners will solicit the consent of the limited partners at the
special meeting. If the limited partners reject the Merger, the Partnership
will bear the portion of the transaction costs based upon the percentage of
"For" votes and the general partners will bear the portion of such transaction
costs based upon the percentage of "Against" votes and abstentions.
13. Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 12 being adjusted to 1,334,008 shares valued at $20.00 per
APF share.
F-20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of the Advisor
and the CNL Restaurant Financial Services Group, and the acquisition of the
Income Fund (the acquisition of the Income Fund is referred to as the
"Acquisition"), and is based on estimates and assumptions set forth below in
the notes to such information which included pro forma adjustments. This
unaudited pro forma financial information has been prepared utilizing the
historical financial statements of APF, the historical combined financial
information of the Income Fund, the Advisor and CNL Restaurant Financial
Services Group (shown separately as CFS and CFC) and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, Income Fund, Advisor and CNL Restaurant Financial Services Group. The
pro forma balance sheet assumes that the Acquisition occurred on 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.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of March 31, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------ ------------ ------------ ---------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Land and Building on
Operating Leases (net
of depreciation)....... 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............ 35,796,119 (25,093,119)(A) 10,703,000 591,712 552,415 4,896,688
Restricted
Cash/Certificates of
Deposit................ 2,007,278 -- 2,007,278 -- -- 853,243
Receivables (net of
allowances)/Due from
Related Party.......... 548,862 -- 548,862 7,141,967 5,457,493 1,969,339
Accrued Rental Income... 5,007,334 -- 5,007,334 -- -- --
Other Assets............ 7,723,678 -- 7,723,678 490,141 298,498 2,731,394
Goodwill................ -- -- -- -- -- --
------------ ------------ ------------ ---------- ---------- ------------
Total Assets........... $708,694,145 $ 33,656,518 $742,350,663 $8,223,820 $6,308,406 $264,700,433
============ ============ ============ ========== ========== ============
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... -- -- -- 119,808 -- --
Due to Related Parties.. 148,629 -- 148,629 -- 563,724 31,310,681
Income Tax Payable...... -- -- -- -- -- 271,741
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 -- -- --
Common Stock--Class A... -- -- -- 6,400 2,000 200
Common Stock--Class B... -- -- -- 3,600 724 501
Additional Paid-in-
Capital................ 670,005,177 -- 670,005,177 4,617,047 5,303,503 3,937,095
Accumulated
Distributions in Excess
of Net Earnings........ (13,293,639) -- (13,293,639) 2,514,205 134,080 628,775
Partners' Capital....... -- -- -- -- -- --
------------ ------------ ------------ ---------- ---------- ------------
Total Liabilities and
Equity................ $708,694,145 $ 33,656,518 $742,350,663 $8,223,820 $6,308,406 $264,700,433
============ ============ ============ ========== ========== ============
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of March 31, 1999
<TABLE>
<CAPTION>
Historical
Combining CNL Income Historical
Pro Forma Fund IV, CNLPro Forma Adjusted
Adjustments Combined APF Ltd. Adjustments Pro Forma
------------ -------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Assets:
Land and Building on Operating
Leases (net of depreciation).. -- 534,537,298 15,385,087 6,118,683 (B2) 556,041,068
Net Investment in Direct
Financing
Leases....................... -- 123,270,117 1,221,384 1,561,168 (B2) 126,052,669
Mortgages and Notes
Receivable................... -- 289,166,027 -- -- 289,166,027
Other Investments............. -- 22,553,274 -- -- 22,553,274
Investment In Joint Ventures.. -- 1,083,564 3,388,240 1,081,962 (B2) 5,553,766
Cash and Cash Equivalents..... (8,795,214)(B1) 7,948,601 689,011 (1,907,786)(B2) 6,385,826
(344,000)(B2)
Restricted Cash/Certificates
of
Deposit...................... -- 2,860,521 -- -- 2,860,521
Receivables (net of
allowances)/Due
from Related Party........... (148,629)(C) 14,969,032 36,107 (145,312)(E) 14,859,827
Accrued Rental Income......... -- 5,007,334 285,013 (285,013)(B2) 5,007,334
Other Assets.................. (2,792,876)(B1) 8,450,835 41,685 (41,685)(B2) 8,450,835
Goodwill...................... 43,146,771 (B1) 43,146,771 -- -- 43,146,771
------------ -------------- ----------- ------------ --------------
Total Assets................. $ 31,410,052 $1,052,993,374 $21,046,527 $ 6,038,017 $1,080,077,918
============ ============== =========== ============ ==============
Liabilities and Equity:
Accounts Payable and Accrued
Liabilities.................. $ -- $ 5,959,055 $ 67,277 $ -- $ 6,026,332
Accrued Construction Costs
Payable...................... -- 10,172,169 -- -- 10,172,169
Distributions Payable......... -- 119,808 600,000 -- 719,808
Due to Related Parties........ (148,629)(C) 31,874,405 145,312 (145,312)(E) 31,874,405
Income Tax Payable............ (271,741)(D) -- -- -- --
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 81,105 -- 1,421,741
Minority Interest............. -- 280,970 -- -- 280,970
Common Stock.................. 61,500 (B1) 434,983 -- 13,168 (B2) 448,151
Common Stock--Class A......... (8,600)(B1) -- -- -- --
Common Stock--Class B......... (4,825)(B1) -- -- -- --
Additional Paid-in-Capital.... 122,938,500 (B1) 792,943,677 -- 26,322,994 (B2) 819,266,671
(13,857,645)(B1)
Accumulated Distributions in
Excess of Net Earnings....... (3,277,060)(B1) (87,315,087) -- -- (87,315,087)
(74,293,189)(B1)
271,741 (D)
Partners' Capital............. -- -- 20,152,833 (20,152,833)(B2) --
------------ -------------- ----------- ------------ --------------
Total Liabilities and
Equity...................... 31,410,052 1,052,993,374 $21,046,527 $ 6,038,017 $1,080,077,918
============ ============== =========== ============ ==============
</TABLE>
F-23
<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
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $12,184,008 2,339,153(a) $14,523,161 $ -- $ -- $ --
Fees................... -- -- -- 2,307,364 1,391,466 8,137
Interest and Other
Income................ 2,214,763 -- 2,214,763 47,213 129,362 5,233,919
----------- ---------- ----------- ---------- ---------- ----------
Total Revenue.......... $14,398,771 $2,339,153 $16,737,924 $2,354,577 $1,520,828 $5,242,056
Expenses:
General and
Administrative
Expenses.............. 1,095,269 -- 1,095,269 2,563,714 1,323,577 64,186
Management and Advisory
Fees.................. 697,364 -- 697,364 -- -- 611,196
Fees Paid to Related
Parties............... -- -- -- 23,326 292,575 --
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 -- -- --
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
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, 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)
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 17,271 -- 17,271 -- -- --
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)
Benefit/(Provision) for
Federal Income Taxes.. -- -- -- 127,496 48,017 73,166
----------- ---------- ----------- ---------- ---------- ----------
Net Earnings (Losses)... $10,490,297 $1,989,688 $12,479,985 $ (195,278) $ (73,545) $ (129,428)
=========== ========== =========== ========== ========== ==========
Earnings Per
Share/Unit............. $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ==========
Book Value Per
Share/Unit............. $ 17.59 $ 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
=========== ========== =========== ========== ========== ==========
Ratio of Earnings to
Fixed Charges.......... 50.03x n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========== ==========
Wtd. Avg. Units
Outstanding............ 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
=========== ========== =========== ========== ========== ==========
Shares Outstanding...... 37,348,464 n/a 37,348,464 n/a n/a n/a
=========== ========== =========== ========== ========== ==========
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
Declared:..............
Pro Forma Wtd. Avg.
Dollars
Outstanding............
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For The Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund IV, Ltd. Adjustments Pro Forma
----------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned Income............ -- $14,523,161 $535,902 5,072 (j) $ 15,064,135
Fees................................ (2,450,663)(b),(c) 1,256,304 -- (14,530)(k) 1,241,774
Interest and Other Income........... 62,068 (d) 7,687,325 9,918 -- 7,697,243
----------- ----------- -------- ---------- ------------
Total Revenue....................... $(2,388,595) $23,466,790 $545,820 $ (9,458) $ 24,003,152
Expenses:
General and Administrative
Expenses........................... (377,734)(e) 4,669,012 55,717 (31,892)(l),(m) 4,692,837
Management and Advisory Fees........ (1,308,560)(f) -- -- -- (n) --
Fees Paid to Related Parties........ (292,786)(g) 23,115 -- -- 23,115
Interest Expense.................... -- 4,819,998 -- -- 4,819,998
State Taxes......................... -- 235,208 15,395 5,441 (o) 256,044
Depreciation--Other................. -- 65,819 -- -- 65,819
Depreciation--Property.............. -- 1,898,278 101,372 51,346 (p) 2,050,996
Amortization........................ 539,335 (h) 546,703 1,159 -- 547,862
Transaction Costs................... -- 125,926 33,018 -- 158,944
----------- ----------- -------- ---------- ------------
Total Expenses...................... (1,439,745) 12,384,059 206,661 24,895 12,615,615
Operating Earnings (Losses) Before
Equity in Earnings of Joint
Ventures/Minority Interests, Gain on
Sale of Properties, and Provision
for Losses on Properties ........... $ (948,850) $11,082,731 $339,159 $ (34,353) $ 11,387,537
Equity Earnings of Joint Ventures/
Minority Interest.................. -- 17,271 73,674 (9,784)(q) 81,161
Provision For Loss on Properties.... -- (215,797) -- -- (215,797)
----------- ----------- -------- ---------- ------------
Net Earnings (Losses) Before Benefit/
(Provision) for Federal Income
Taxes............................... (948,850) 10,884,205 412,833 (44,137) 11,252,901
Benefit/(Provision) for Federal
Income Taxes....................... (248,679)(i) -- -- -- --
----------- ----------- -------- ---------- ------------
Net Earnings (Losses)................ $(1,197,529) $10,884,205 $412,833 $ (44,137) $ 11,252,901
=========== =========== ======== ========== ============
Earnings Per Share/Unit.............. $ n/a $ n/a $ 6.88 $ n/a $ 0.25
=========== =========== ======== ========== ============
Book Value Per Share/Unit............ $ n/a $ n/a $ 335.88 $ n/a $ 16.34
=========== =========== ======== ========== ============
Dividends Per Share/Unit............. $ n/a $ n/a $ 10.00 $ n/a $ n/a
=========== =========== ======== ========== ============
Ratio of Earnings to Fixed Charges... n/a n/a n/a n/a 3.20x
=========== =========== ======== ========== ============
Wtd. Avg. Units Outstanding.......... n/a n/a 60,000 n/a n/a
=========== =========== ======== ========== ============
Wtd. Avg. Shares Outstanding......... 6,150,000 43,497,401 n/a 1,316,808 44,814,209 (r)
=========== =========== ======== ========== ============
Shares Outstanding................... 6,150,000 43,498,464 n/a 1,316,808 44,815,272
=========== =========== ======== ========== ============
Calculation of Pro Forma
Distributions:
Pro Forma Cash from Operations from
Statement of Cash Flows............ $(23,123,136)
Addback Pro Forma Investments in
Notes Receivable................... 42,571,895
------------
Adjusted Pro Forma Distributions
Declared:........................... $ 19,448,759 (s)
============
Pro Forma Wtd. Avg. Dollars
Outstanding......................... $896,284,182 (t)
============
Pro Forma Cash Distributions Declared
per $10,000 Investment.............. $ 217 (u)
============
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 21,919,865(a) $55,049,526 $ -- $ -- $ --
Fees................... -- -- -- 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 -- 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $21,919,865 $64,106,902 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 -- 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 -- 1,851,004 -- -- 2,807,430
Fees to Related
Parties............... -- -- -- 1,247,278 1,773,406 --
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 -- -- --
Amortization........... 11,808 -- 11,808 57,077 -- 95,116
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
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties and
Provision for Losses on
Properties ............ $32,778,080 $19,030,497 $51,808,577 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) -- (14,138) -- -- --
Gain on Sale of
Properties............ -- -- -- -- -- --
Gain on
Securitization........ -- -- -- -- -- 3,694,351
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
Benefit/(Provision) for
Federal Income Taxes.. -- -- -- (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $19,030,497 $51,182,905 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Units
Outstanding............ n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,564,723 34,212,942 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 34,757 37,372,684 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Calculation of Pro Forma
Distributions Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows.............
Addback Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable......
Addback Pro Forma
Investments in Notes
Receivable............
Adjusted Pro Forma
Distributions Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund IV, Ltd. Adjustments Pro Forma
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ -- $55,049,526 $2,314,890 20,286 (j) $ 57,384,702
Fees................... (32,715,768)(b),(c) 3,226,263 -- (31,155)(k) 3,195,108
Interest and Other
Income................ 207,144 (d) 32,221,925 60,950 -- 32,282,875
------------ ----------- ---------- --------- -------------
Total Revenue.......... $(32,508,624) $90,497,714 $2,375,840 $ (10,869) $ 92,862,685
Expenses:
General and
Administrative........ (4,241,719)(e) 15,939,556 227,263 (71,599)(l),(m) 16,095,220
Management and Advisory
Fees.................. (4,658,434)(f) -- -- -- (n) --
Fees to Related
Parties............... (2,161,897)(g) 858,787 -- -- 858,787
Interest Expense....... -- 21,498,589 -- -- 21,498,589
State Taxes............ -- 567,446 15,747 8,202 (o) 591,395
Depreciation--Other.... -- 199,157 -- -- 199,157
Depreciation--
Property.............. (340,898)(r) 6,590,760 425,483 205,385 (p) 7,221,628
Amortization........... 2,157,339 (h) 2,321,340 3,492 -- 2,324,832
Transaction Costs...... -- 157,054 18,286 -- 175,340
------------ ----------- ---------- --------- -------------
Total Expenses......... (9,245,609) 48,132,689 690,271 141,988 48,964,948
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties and
Provision for Losses on
Properties............. $(23,263,015) $42,365,025 $1,685,569 $(152,857) $ 43,897,737
Equity in Earnings of
Joint Venture/Minority
Interest.............. -- (14,138) (90,144) (39,137)(q) (143,419)
Gain on Sale of
Properties............ -- -- 226,024 -- 226,024
Gain on
Securitization........ -- 3,694,351 -- -- 3,694,351
Provision For Loss on
Properties............ -- (611,534) -- -- (611,534)
------------ ----------- ---------- --------- -------------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (23,263,015) 45,433,704 1,821,449 (191,994) 47,063,159
Benefit/(Provision) for
Federal Income Taxes.. 6,898,434 (i) -- -- -- --
------------ ----------- ---------- --------- -------------
Net Earnings (Losses)... $(16,364,581) $45,433,704 $1,821,449 $(191,994) $ 47,063,159
============ =========== ========== ========= =============
Earnings Per
Share/Unit............. $ n/a $ n/a $ 30.36 $ n/a $ 1.13
============ =========== ========== ========= =============
Book Value Per
Share/Unit............. $ n/a $ n/a $ 339.00 $ n/a $ 16.39
============ =========== ========== ========= =============
Dividends Per
Share/Unit............. $ n/a $ n/a $ 60.56 $ n/a $ n/a
============ =========== ========== ========= =============
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.15x
============ =========== ========== ========= =============
Wtd. Avg. Units
Outstanding............ n/a n/a 60,000 n/a n/a
============ =========== ========== ========= =============
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,362,942 n/a 1,316,808 41,679,750 (s)
============ =========== ========== ========= =============
Shares Outstanding...... 6,150,000 43,522,684 n/a 1,316,808 44,839,492
============ =========== ========== ========= =============
Calculation of Pro Forma
Distributions Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows............. $ 57,837,218
Addback Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable...... (265,871,668)
Addback Pro Forma
Investments in Notes
Receivable............ 288,590,674
-------------
Adjusted Pro Forma
Distributions Declared: $ 80,556,224 (t)
=============
Pro Forma Wtd. Avg.
Dollars
Outstanding............ $ 833,595,003 (u)
=============
Pro Forma Cash
Distributions Declared
per $10,000
Investment............. $ 966 (v)
=============
</TABLE>
F-27
<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 Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 10,490,297 $ 1,989,688 (a) $ 12,479,985 $ (195,278) $ (73,545) $ (129,428)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 1,548,813 349,465 (b) 1,898,278 39,581 -- --
Amortization expense... 7,368 -- 7,368 -- 26,238 424,697
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 -- -- --
Provision for loss on
land, buildings, and
direct financing
leases................ 215,797 -- 215,797 -- -- (73,166)
Decrease (increase) in
other receivables..... (82,660) -- (82,660) (377,933) (242,251) (6,771)
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)
------------- ------------ ------------- ----------- --------- ------------
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)
Cash Flows from
Investing Activities:
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............
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.................. -- -- -- -- -- --
Other.................. -- -- -- -- -- --
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) investing
activities............ (108,916,178) (58,749,637) (167,665,815) (31,577) (10,092) 134,981
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders...... 210,735 -- 210,735 1,288,673 20,572 --
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)
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 (decrease)
in cash................ (87,403,718) (22,753,966) (110,157,684) (121,596) (410,158) 2,370,610
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
============= ============ ============= =========== ========= ============
</TABLE>
F-28
<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>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Funds IV, Ltd. Adjustments Pro Forma
----------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(1,197,529)(a) $ 10,884,205 $ 412,833 $ (44,137)(a) $ 11,252,901
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... -- 1,937,859 101,372 51,346 (b) 2,090,577
Amortization expense... 539,335 (c) 997,638 1,159 -- 998,797
Minority interest in
income of consolidated
joint venture......... -- 7,763 -- -- 7,763
Equity in earnings of
joint ventures, net of
distributions......... -- 23,234 7,866 9,784 (d) 40,884
Provision for loss on
land, buildings, and
direct financing
leases................ -- 142,631 -- -- 142,631
Decrease (increase) in
other receivables..... -- (709,615) (7,755) -- (717,370)
Decrease (increase) in
accrued interest on
mortgage note
receivable............ -- (449,580) -- -- (449,580)
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...... -- 29,359 686 -- 30,045
Decrease in net
investment in direct
financing leases...... -- 787,375 10,098 -- 797,473
Increase in accrued
rental income......... -- (1,047,421) (5,289) -- (1,052,710)
Decrease (increase) in
intangibles and other
assets................ -- (22,612) -- -- (22,612)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... -- (768,267) 26,042 -- (742,225)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
Issuance costs paid on
behalf of the entity.. -- 97,403 (3,666) -- 93,737
Decrease in accrued
interest.............. -- (362,877) -- -- (362,877)
Increase in rents paid
in advance and
deposits.............. -- 386,365 21,485 -- 407,850
Increase (decrease) in
deferred rental
income................ -- 862,647 -- -- 862,647
----------- ------------- --------- ----------- -------------
Total adjustments...... 539,335 (34,589,165) 151,998 61,130 (34,376,037)
----------- ------------- --------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (658,194) (23,704,960) 564,831 16,993 (23,123,136)
Cash Flows from
Investing Activities:
Additions to land and
buildings on operating
leases................ -- (135,820,136) -- -- (135,820,136)
Investment in direct
financing leases...... -- (29,608,346) -- -- (29,608,346)
Investment in joint
venture............... -- (117,662) (533,200) -- (650,862)
Acquisition of
businesses............ (8,795,214)(f) (8,795,214) (1,907,786)(g) (11,047,000)
(344,000)(g)
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 -- -- 75,010
Investment in notes
receivable............ -- (1,087,483) -- -- (1,087,483)
Collection on notes
receivable............ -- 239,596 -- -- 239,596
Decrease in restricted
cash.................. -- -- 533,598 -- 533,598
Other.................. -- -- (15,600) -- (15,600)
----------- ------------- --------- ----------- -------------
Net cash provided by
(used in) investing
activities............ (8,795,214) (176,367,717) (15,202) (2,251,786) (178,634,705)
Cash Flows from
Financing Activities:
Subscriptions received
from
stockholders........... -- 1,519,980 -- -- 1,519,980
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)
Distributions to holders
of minority interest... -- (8,610) -- -- (8,610)
Distributions to limited
partners............... -- 0 (600,000) -- (600,000)
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 (600,000) -- 81,700,441
Net increase (decrease)
in cash................ (9,453,408) (117,772,236) (50,371) (2,234,793) (120,057,400)
Cash at beginning of
year................... -- 127,401,796 739,382 -- 128,141,178
----------- ------------- --------- ----------- -------------
Cash at end of year..... $(9,453,408) $ 9,629,560 $ 689,011 $(2,234,793) $ 8,083,778
=========== ============= ========= =========== =============
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 32,152,408 $ 19,030,497(a) $ 51,182,905 $10,656,379 $(468,133) $ 427,134
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 4,042,290 2,889,368(b) 6,931,658 119,923 79,234 --
Amortization expense... 11,808 -- 11,808 56,003 -- 2,246,273
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)
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
------------- ------------ ------------- ----------- --------- -------------
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
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) (58,749,637)(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............
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
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders...... 385,523,966 -- 385,523,966 966,115 51,830 50,100
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
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
============= ============ ============= =========== ========= =============
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund IV, Ltd. Adjustments Pro Forma
------------ ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(16,364,581)(a) $ 45,433,704 $1,821,449 $ (191,994)(a) $ 47,063,159
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... (340,898)(b) 6,789,917 425,481 205,385 (b) 7,420,783
Amortization expense... 2,157,339 (c) 4,471,423 3,494 -- 4,474,917
Minority interest in
income of consolidated
joint venture......... -- 30,156 -- -- 30,156
Equity in earnings of
joint ventures, net of
distributions......... -- (15,440) 338,504 39,137 (d) 362,201
Loss (gain) on sale of
land, building, net
investment in direct
leases................ -- -- (226,024) -- (226,024)
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ -- 1,009,576 -- -- 1,009,576
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) 8,607 -- (2,534,806)
Increase in accrued
interest income
included in notes
receivable............ -- (170,492) -- -- (170,492)
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 1,279 -- 8,525
Decrease in net
investment in direct
financing leases...... -- 1,971,634 37,907 -- 2,009,541
Increase in accrued
rental income......... -- (2,187,652) (40,515) -- (2,228,167)
Increase in intangibles
and other assets...... -- (154,351) -- -- (154,351)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... -- 846,680 (26,960) -- 819,720
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. -- (133,364) 9,461 -- (123,903)
Increase in accrued
interest.............. -- (77,968) -- -- (77,968)
Increase in rents paid
in advance and
deposits.............. -- 436,843 9,637 -- 446,480
Decrease in deferred
rental income......... -- 693,372 -- -- 693,372
------------ ------------- ---------- ----------- -------------
Total adjustments...... 1,816,441 9,988,666 540,871 244,522 10,774,060
------------ ------------- ---------- ----------- -------------
Net cash provided by
(used in)
operating activities.. (14,548,140) 55,422,371 2,362,320 52,528 57,837,219
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. -- 2,385,941 2,526,354 -- 4,912,295
Additions to land and
buildings on operating
leases................ -- (259,469,347) (275,000) -- (259,744,347)
Investment in direct
financing leases...... -- (47,115,435) -- -- (47,115,435)
Investment in joint
venture............... -- (974,696) (493,398) -- (1,468,094)
Acquisition of
businesses............ (8,795,214)(f) (8,795,214) -- (1,907,786)(g) (11,047,000)
(344,000)(g)
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 -- -- 291,990
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.................. -- 0 (533,598) -- (533,598)
Increase in intangibles
and other assets...... -- (6,281,069) -- -- (6,281,069)
Other.................. -- 200,000 -- -- 200,000
------------ ------------- ---------- ----------- -------------
Net cash provided by
(used in) investing
activities............ (8,795,214) (343,010,075) 1,224,358 (2,251,786) (344,037,503)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders...... -- 386,592,011 -- -- 386,592,011
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) -- -- (34,073)
Distributions to limited
partners............... -- -- (3,723,748) -- (3,723,748)
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 (3,723,748) -- 334,920,014
Net increase (decrease)
in cash................ (23,343,354) 51,056,058 (137,070) (2,199,258) 48,719,730
Cash at beginning of
year................... -- 49,829,130 876,452 -- 50,705,582
------------ ------------- ---------- ----------- -------------
Cash at end of year..... $(23,343,354) $ 100,885,188 $ 739,382 $(2,199,258) $ 99,425,312
============ ============= ========== =========== =============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of 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 Income Fund. This unaudited pro forma financial
information has been prepared utilizing the historical financial statements of
APF and the historical combined financial information of the Advisor, CNL
Restaurant Financial Services Group and the Income Fund and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, the Advisor the CNL Restaurant Financial Services Group and the Income
Fund. The Pro Forma Balance Sheet was prepared as if the transactions described
above occurred on 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 Fund 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 Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
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
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
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.
(B) Represents the effect of recording the acquisitions of the Advisor,
the CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Shares Offered.......... 3,800,000 2,350,000 1,316,808.1 7,466,808.1
Exchange Value.......... $ 20 $ 20 $ 20 $ 20
Share Consideration..... $76,000,000 $47,000,000 $26,336,162 $149,336,162
Cash Consideration...... -- -- 344,000 344,000
APF Transaction Costs... 5,434,441 3,360,773 1,907,786 10,703,000
----------- ----------- ----------- ------------
Total Purchase
Price.............. $81,434,441 $50,360,773 $28,587,948 $160,383,162
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets -
Historical............. $ 7,141,252 $10,006,878 $20,152,833 $ 37,300,963
Purchase Price
Adjustments:
Land and buildings on
operating leases..... 6,118,683 6,118,683
Net investment in
direct financing
leases............... 1,561,168 1,561,168
Investment in joint
ventures............. 1,081,962 1,081,962
Accrued rental
income............... (285,013) (285,013)
Intangibles and other
assets............... (2,792,876) (41,685) (2,834,561)
Goodwill*............. 43,146,771 -- 43,146,771
Excess purchase
price................ 74,293,189 -- -- 74,293,189
----------- ----------- ----------- ------------
Total Allocation.... $81,434,441 $50,360,773 $28,587,948 $160,383,162
=========== =========== =========== ============
</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 pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $74,293,189 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 $43,146,771 relating to the
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
acquisition of the CNL Financial Services Group is being amortized over 20
years. APF did not acquire any intangibles as part of any of the
acquisitions. The entries were as follows:
<TABLE>
<S> <C> <C>
1.Common Stock
(CFA, CFS,
CFC)--Class A.. 8,600
Common Stock
(CFA, CFS,
CFC)--Class
B............ 4,825
APIC (CFA,
CFS, CFC).... 13,857,645
Retained
Earnings..... 3,277,060
Accumulated
distributions
in excess of
earnings..... 74,293,189
Goodwill for
CFC
(Intangibles
and other
assets)...... 43,146,771
CFC/CFS Org
Costs/Other
Assets...... 2,792,876
Cash to pay
APF
transaction
costs....... 8,795,214
APF Common
Stock....... 61,500
APF APIC..... 122,938,500
(To record
acquisition
of CFA, CFS
and CFC)
2.Partners
Capital........ 20,152,833
Land and
buildings on
operating
leases....... 6,118,683
Net investment
in direct
financing
leases....... 1,561,168
Investment in
joint
ventures..... 1,081,962
Accrued
rental
income...... 285,013
Intangibles
and other
assets...... 41,685
Cash to pay
APF
Transaction
costs....... 1,907,786
Cash
consideration
to Income
Funds....... 344,000
APF Common
Stock....... 13,168
APF APIC..... 26,322,994
(To record
acquisition
of Income
Fund)
</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 Income Fund of $145,312 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, 1999.
(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.
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................... $ (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 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
</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>
(g) Represents the elimination of $292,786 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from
agreements between these entities.
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4):
<TABLE>
<S> <C>
Amortization of goodwill....................................... $539,335
</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 $5,072 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................... $ --
Reimbursement of administrative costs......................... (14,530)
--------
$(14,530)
========
</TABLE>
(l) Represents the elimination of $14,530 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $17,362 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $5,441 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through May 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 Fund 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 $51,346 as a
result of adjusting the historical basis of the real estate wholly
owned by the Income Fund to fair value as a result of accounting
for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings is
being depreciated using the straight-line method over the
remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $9,784 as a result of adjusting the historical basis of the real
estate owned by the Income Fund, indirectly through joint venture
or tenancy in common arrangements, to fair value as a result of
accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 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
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
approved a proposal for a one-for-two reverse stock split and a
proposal to increase the number of authorized common shares of APF on
January 1, 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.
(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
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates.......................... $ (1,773,406)
Secured equipment lease fees.............................. (54,998)
Advisory fees............................................. (305,030)
Reimbursement of administrative costs..................... (408,762)
Acquisition fees.......................................... (21,794,386)
Underwriting fees......................................... (388,491)
Administrative, executive and guarantee fees.............. (1,233,043)
Servicing fees............................................ (1,570,331)
Development fees.......................................... (229,153)
Management fees........................................... (1,851,004)
------------
Total................................................... $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term of
the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the year ended
December 31, 1998, which were deferred for pro forma purposes as
described in 5(II)(c). These deferred loan origination fees are
being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $207,144
</TABLE>
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs........................... $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,851,004)
Administrative executive and guarantee fees................ (1,233,043)
Servicing fees............................................. (1,269,357)
Advisory fees.............................................. (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(g) Represents the elimination of $2,161,897 in fees between the
Advisor and the CNL Restaurant Financial Services Group resulting
from agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4)
<TABLE>
<S> <C>
Amortization of goodwill..................................... $2,157,339
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $20,286 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................... $ --
Reimbursement of administrative costs......................... (31,155)
--------
$(31,155)
========
</TABLE>
(l) Represents the elimination of $31,155 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $40,444 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $8,202 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1998 through 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 Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(p) Represents an increase in depreciation expense of $205,385 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Fund through joint venture or tenancy in common
arrangements with affiliates or unrelated third parties, to fair
value as a result by the Income Fund to fair value as a result of
accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $39,137 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF
and the Advisor which on a historical basis were capitalized as
part of the basis of the building.
(s) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a reverse stock split proposal and a
proposal to increase the number of authorized common shares of APF
on January 1, 1998.
(t) 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 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.
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Concluded)
(g) Represents the use of cash i) to pay for the cash consideration
proposed in the offer to acquire the Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non-Cash Investing Activities:
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the use of amounts borrowed under APF's credit facility
and the use of cash to 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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
F-40
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund IV, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund IV, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
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(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
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Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
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<PAGE>
Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among CNL American Properties Fund, Inc., a
Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware limited
partnership (the "Operating Partnership"), CNL APF GP Corp., a Delaware
corporation (the "OP General Partner"), CNL Income Fund IV, Ltd., a Florida
limited partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr.,
and CNL Realty Corporation, a Florida corporation (together with Messrs. Bourne
and Seneff, the "General Partners"). APF, the Operating Partnership, the OP
General Partner, the Fund and the General Partners are referred to collectively
herein as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund will
be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. AMENDMENTS TO MERGER AGREEMENT
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against
the Merger and affirmatively elect the note option, such limited partners
shall be entitled to receive, in lieu of the Share Consideration, notes
(the "Notes") in the aggregate amount equal to 97% of the value (based on
the Exchange Value as defined in the Registration Statement) of the Share
Consideration such Dissenting Partners would have otherwise received had
such partners not elected to receive the Notes (the "Note Option"). The
Notes will mature on the fifth anniversary of the Closing Date and will
bear interest at a fixed rate equal to seven percent. The aggregate Share
Consideration shall be reduced on a one-for-basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners
not elected the Note Option."
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
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1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to Dissenting
Limited Partners shall not have exceeded 15% of the value of the Share
Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. GENERAL
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will constitute
one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or interpretation
of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any choice or
conflict of law provision or rules (whether of the State of Florida or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
By: /s/ James M. Seneff, Jr.
----------------------------
James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
By: /s/ Robert A. Bourne
----------------------------
Robert A. Bourne
Its: President
CNL APF GP Corp.
By: /s/ Robert A. Bourne
----------------------------
Robert A. Bourne
Its: President
CNL INCOME FUND IV, LTD.
By: CNL Realty Corporation, as
General Partner
By: /s/ James M. Seneff, Jr.
----------------------------
James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
By: /s/ James M. Seneff, Jr.
-------------------------------
James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
-------------------------------
Robert A. Bourne, as General
Partner
/s/ James M. Seneff, Jr.
-------------------------------
James M. Seneff, Jr., as General
Partner
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<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund IV, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
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"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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<PAGE>
"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 2,668,016 fully paid and nonassessable APF Common
Shares (1,334,008 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $24,307,286, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 58,331,984 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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<PAGE>
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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<PAGE>
APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 60,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(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 $2,668,016 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $266,802 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
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 IV, 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
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CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND V, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund V, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., wholly-owned limited partnership through which APF conducts its
business and which we call the Operating Partnership.
Unless otherwise indicated, APF Share numbers in this consent solicitation
reflect a one-for-two reverse stock split approved by the APF stockholders on
May 27, 1999, and effective on June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business Income Funds, is the ownership of restaurant properties leased
to operators of national and regional restaurant chains on a triple-net lease
basis. Unlike your Income Fund which is restricted, due to capital and other
limitations, to owning and leasing a static number of restaurant properties on
a triple-net basis, APF has the ability to offer a complete range of restaurant
property services to operators of national and regional restaurant chains, from
triple-net leasing and mortgage financing to site selection, construction
management and build-to-suit development. If APF acquires all of the Income
Funds in the Acquisition, APF expects to have total assets of approximately
$1.5 billion at the time of the consummation of the Acquisition and will be one
of the largest triple-net lease REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 1,024,516 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is uncertain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for
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trading on the NYSE. We do not know the value at which an APF Share will trade
on the NYSE upon listing. It is possible that the APF Shares will trade at
prices substantially below the exchange value. APF has, however, recently sold
$750 million of APF Shares through three public offerings. In each offering,
the offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At March 31, 1999, APF has invested all of the net offering proceeds to acquire
restaurant properties, to make mortgage loans and to pay fees and other
expenses.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the Acquisition?
There are a number of material risks and considerations that you should
consider, including:
. We are uncertain as to the value at which APF Shares will trade
following listing.
. We have material conflicts in light of our being both general partners
of the Income Funds and members of APF's Board of Directors.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. As stated below, the Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
Did you receive a fairness opinion in connection with APF's acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
with respect to the fairness, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote against the
Acquisition.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the colored
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the Special Meeting of Limited
Partners, your units may be voted "For" or "Against" APF's acquisition of your
Income Fund. If you prefer, you may instead vote by telephone, following the
instructions on your consent form. If you sign and send in your consent form
and do not indicate how you want to vote, your consent form will be
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counted as a vote "For" the Acquisition. If you do not vote or you abstain from
voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2004 in an amount equal to 97% of your portion of the APF Share consideration
based on the exchange value, that would otherwise have been paid to your Income
Fund, Please note that you may only receive the notes if you vote "Against" the
Acquisition, and you elect to receive notes on your consent form. You will
receive APF Shares if your Income Fund elects to be acquired in the Acquisition
and you vote "For" the Acquisition, or you vote "Against" the Acquisition and
do not affirmatively select the notes option on your consent form. In addition,
if Limited Partners in your Income Fund elect to receive notes in an amount
greater than 15% of the estimated value of APF Shares, based on the exchange
value, to be paid to your Income Fund, then APF has the right to decline to
acquire your Income Fund. The notes will not be listed on any exchange or
automated quotation system, and a market for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
person subject to income taxation or a tax-paying entity and you receive APF
Shares, the tax that you must pay will generally be based on the difference
between the value of the APF Shares you receive and the tax basis of your
Units. If you elect to receive notes, your tax will be based upon your
allocable share of the gain which will be recognized by your Income Fund; your
Income Fund's gain will generally equal the excess, if any, of the value of the
APF Shares received by your Income Fund over the tax basis of your Income
Fund's net assets. Some of the gain may be subject to the 25% rate of tax
applicable to certain types of real property gain.
We urge you to consult with your tax advisor to evaluate the taxes that will be
incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $230. To review
the tax consequences to the Limited Partners of the Income Funds in greater
detail, see pages 180 through 194 of the consent solicitation and "Federal
Income Tax Considerations" in this supplement.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds acquired by
APF may be differently constructed, located in a different geographic area or
of a different restaurant chain than the restaurant properties owned by your
Income Fund. Because the market for real estate may vary from one region of the
country to another, the change in geographic diversity may expose you to
different and greater risks than those to which you are presently exposed. For
geographic information regarding APF's and the Income Funds' restaurant
properties, see "APF's Business and The Restaurant Properties--Business
Objectives and Strategies" and "--The Restaurant Properties--General" and
"Business of the Income Funds--Description of Restaurant Properties" in the
consent solicitation.
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The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund. This description is qualified in its entirety
by the more detailed discussion in the section entitled "Risk Factors"
contained in the consent solicitation.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease below the exchange value upon listing.
Your Income Fund will be receiving 1,024,516 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices substantially below
the exchange value or the historical per share book value of the assets of APF.
The APF Shares have been approved for listing on the NYSE, subject to official
notice of issuance. Prior to listing, the existing APF stockholders have not
had an active trading market in which they could sell their APF Shares.
Additionally, any Limited Partners of the Income Funds who become APF
stockholders as a result of the Acquisition, will have transformed their
investment in non-tradable units into an investment in freely tradable APF
Shares. Consequently, some of these stockholders may choose to sell their APF
Shares upon listing at a time when demand for APF Shares may be relatively low.
The market price of the APF Shares may be volatile after the Acquisition, and
the APF Shares could trade at prices substantially less than the exchange value
as a result of increased selling activity following the issuance of the APF
Shares, the interest level of investors in purchasing the APF Shares after the
Acquisition and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund made $920, $920 and $1,535, respectively, in distributions, per $10,000
investment to you. The amount distributed to you in 1998 included a special
distribution of net sales proceeds of $735 per $10,000 investment. While
historically, APF has made distributions equal to 7.625% per APF Share, based
on the exchange value, we cannot be sure that APF will be able to maintain this
level of distributions in the future. In the event that APF is unable to
maintain this level of distributions, your distributions per $10,000 investment
may decrease substantially after the Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have two material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Funds. As Board members of APF, Messrs. Seneff and
Bourne have an interest in the completion of the Acquisition which may conflict
with your interest as a Limited Partner of the Income Fund or with their own
positions as the general partners of your Income Fund. While we will not
receive any APF Shares as a result of APF's Acquisition of your Income Fund,
we, as the general partners of your Income Fund, may be required to pay all or
a substantial portion of the Acquisition costs allocated to your Income Fund to
the extent that you or other Limited Partners of your Income Fund vote against
the Acquisition. For additional information regarding the Acquisition costs
allocated to your Income Fund, see "Comparison of Alternative Effect on
Financial Condition and Results of Operations" contained in this supplement.
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The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own and lease on a triple-net basis, on the date that the Acquisition
is consummated, assuming only your Income Fund was acquired as of March 31,
1999, 536 restaurant properties. The risks inherent in investing in an
operating company such as APF include that APF may invest in new restaurant
properties that are not as profitable as APF anticipated, may incur of
substantial indebtedness to make future acquisitions of restaurant properties
which it may be unable to repay and may make mortgage loans to prospective
operators of national and regional restaurant chains which may not have the
ability to repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through sale of your APF Shares, not from
liquidation proceeds from restaurant properties. Continuation of your Income
Fund would, on the other hand, permit you eventually to receive liquidation
proceeds, if any, from the sale of the Income Fund's restaurant properties, and
your share of these sale proceeds could be higher than the amount realized from
the sale of your APF Shares (or from the combination of cash paid to and
payments on any notes if you elect to receive the notes.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to certain risks inherent in the business of lending,
such as the risk of default 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. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a
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residual-interest security and retain an interest-only strip security. The fair
value of the residual-interest and interest-only strip security would be the
present value of the estimated net cash flows to be received after considering
the effects of prepayments and credit losses. The capitalized mortgage
servicing rights and mortgage-related securities would be valued using
prepayment, default, and interest rate assumptions that APF believes are
reasonable. The amount of revenue recognized upon the sale of loans or loan
participations will vary depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to Fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
March 31, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.62x and its ratio of debt-to-total assets was
28.03%. If only your Income Fund were acquired as of that date, APF's debt
service ratio would have been 3.77x and its ratio of debt-to-total assets would
have been 27.49%. Up through the time immediately prior to the consummation of
the Acquisition, as a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former limited partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
S-6
<PAGE>
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect of APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgages. APF
typically does not require that a third party guarantee the obligations of the
tenant or the borrower. The ability of the tenants or borrowers to pay their
obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to: (1)
national, regional and local economic conditions (which may be adversely
affected by industry slowdowns, employer relocations, prevailing employment
conditions and other factors), which may reduce consumer demand for the
products offered by APF's customers; (2) local real estate conditions; (3)
changes or weaknesses in specific industry segments; (4) perceptions by
prospective customers of the safety, convenience, services and attractiveness
of the restaurant chain; (5) changes in demographics, consumer tastes and
traffic patterns; (6) the ability to obtain and retain capable management; (7)
changes in laws, building codes, similar ordinances and other legal
requirements, including laws increasing the potential liability for
environmental conditions existing on properties; (8) the inability of a
particular restaurant chain's computer system, or that of its franchisor or
vendors, to adequately address Year 2000 issues; (9) increases in operating
expenses; and (10) increases in minimum wages, taxes, including income,
service, real estate and other taxes, or mandatory employee benefits.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as a stockholder, would be reduced substantially for
each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to certain adjustments that are unique to REITs, a REIT generally
must distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans. For a more detailed discussion of the risks associated with the
Acquisition, see "Risk Factors" in the consent solicitation.
S-7
<PAGE>
CONSIDERATION PAID TO INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth information regarding the estimated value of
the consideration that your Income Fund will receive in the Acquisition. The
APF Shares payable to your Income Fund will not change if APF acquires fewer
than all of the Income Funds in the Acquisition. This data assumes that none of
the Limited Partners of your Income Fund has elected to receive the notes. You
should note that the APF Shares may trade at prices substantially below the
exchange value upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited
Partner
Original Investments
Limited Less any
Partner Distributions Estimated Value
Investments of Net Sales Number of Estimated of APF Shares
Less any Proceeds per APF Value of APF Estimated Value per Average
Distributions $10,000 Shares Shares Estimated of APF Shares $10,000 Original
of Net Sales Original Offered to Payable to Acquisition after Acquisition Limited Partner
Proceeds(1) Investment(1) Income Fund Income Fund Expenses Expenses Investment
- ------------- ------------- ----------- ------------ ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$22,258,682 $8,903 1,024,516 $20,490,320 $240,000 $20,250,320 $8,100
</TABLE>
- --------
(1) The original Limited Partner investment was $25,000,000. These columns
reflect, as of March 31, 1999, an adjustment to the Limited Partners'
original investments based on distributions of net sales proceeds received
from sales of restaurant properties (both as a special distribution and
those that were added to working capital and subsequently distributed).
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2004. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2004. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest. For more detailed information, see "The Acquisition" and
"Description of the Notes" in the consent solicitation.
EXPENSES OF ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
S-8
<PAGE>
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1)...................................................... $ 11,711
Appraisals and Valuation(2)........................................ 4,290
Fairness Opinions(3)............................................... 30,000
Solicitation Fees(4)............................................... 13,583
Printing and Mailing(5)............................................ 67,755
Accounting and Other Fees(6)....................................... 25,540
--------
Subtotal......................................................... $152,879
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(7).......................... $ 42,525
Legal Closing Fees(8).............................................. 21,005
Partnership Liquidation Costs(9)................................... 23,591
--------
Subtotal......................................................... 87,121
--------
Total.............................................................. $240,000
========
</TABLE>
--------
(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $312,063. Your
Income Fund's pro-rata portion of these fees was determined based
on the percentage of the value of the APF Share consideration
payable to your Income Fund, based on the exchange value, to the
total value of the APF Share consideration payable to all of the
Income Funds, based on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the
Income Funds in connection with the Acquisition were $105,420. Your
Income Fund's pro-rata portion of these fees was determined based
on number of restaurant properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and
incurred a fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $249,626. Your
Income Fund's pro-rata portion of these fees was determined based
on the number of Limited Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to be
$1,610,399. Your Income Fund's pro-rata portion of these fees was
determined based on the number of Limited Partners in your Income
Fund.
(6) Aggregate accounting and other fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to be
$683,904. Your Income Fund's pro-rata portion of these fees was
determined based on the percentage of your Income Fund's total
assets as of March 31, 1999 to the total assets of all of the
Income Funds as of March 31, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by
all of the Income Funds in connection with the Acquisition is
estimated to be $1,312,808. Your Income Fund's pro-rata portion of
these fees was determined based on the percentage of the value of
the APF Share consideration payable to your Income Fund, based on
the exchange value, to the total value of the APF Share
consideration payable to all of the Income Funds, based on the
exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,454. Your
Income Fund's pro-rata portion of these fees was determined based
on the percentage of your Income Fund's total assets as of March
31, 1999 to the total assets of all of the Income Funds as of March
31, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of
the Income Funds in connection with the Acquisition is estimated to
be $895,326. Your Income Fund's pro-rata portion of these costs was
determined based on the percentage of the value of the APF Share
consideration payable to your Income Fund, based on the exchange
value, to the total value of the APF Share consideration payable to
all of the Income Funds, based on the exchange value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income
S-9
<PAGE>
Funds that are acquired in proportion to their respective exchange values. If
none of the Income Funds are acquired by APF, all of the solicitation fees will
be payable by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 80% or more in value of your Income Fund's
restaurant properties acquired within two years of the initial date of the
prospectus (December 16, 1988). Because the Acquisition of your Income Fund is
a "Liquidating Sale" within the meaning of the partnership agreement, it may
not be consummated without the approval of Limited Partners representing
greater than 50% of the outstanding units.
Consequence of Failure to Approve the Acquisition
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition, the Acquisition may
not be consummated under the terms of the partnership agreement. In such event,
we plan to continue to operate your Income Fund as a going concern and to
eventually dispose of your Income Fund's restaurant properties approximately 7
to 15 years after they were acquired or as soon thereafter if, in our opinion,
market conditions permit, as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at . We and members
of APF's management intend to solicit actively your support for the Acquisition
and would like to use the special meeting to answer questions about the
Acquisition and the solicitation materials and to explain in person our reasons
for recommending that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the consent form constitute the solicitation
materials being distributed to you and the other Limited Partners to obtain
their votes "For" or "Against" the Acquisition of your Income Fund by APF.
Please note that we refer, collectively, to the power of attorney and Limited
Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning on attending the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of
S-10
<PAGE>
your Income Fund. The solicitation period will commence upon delivery of the
solicitation materials to you (on or about , 1999 and will continue until
the later of (a) , 1999, a date not less than 60 calendar days from the
initial delivery of the solicitation materials, or (b) such later date as we
may select and as to which we give you notice. At our discretion, we may elect
to extend the solicitation period. Under no circumstances will the solicitation
period be extended beyond March 31, 2000. Any consent form received by
Corporate Election Services prior to 5:00 p.m., Eastern time, on the last day
of the solicitation period will be effective provided that such consent form
has been properly completed and signed. If you fail to return a signed consent
form by the end of the solicitation period, your units will be counted as
voting "Against" the Acquisition of your Income Fund and you will receive APF
Shares if your Income Fund is acquired. If you prefer, you may instead vote by
telephone according to the instructions on your consent form.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the quarter
ended March 31, 1999, the aggregate amounts accrued or paid by your Income Fund
to us are shown below under "Historical Distributions Paid to the General
Partners and Affiliates" and the estimated amounts of compensation that would
have been paid had the Acquisition been in effect for the periods presented,
are shown below under "Pro Forma Distributions to Be Paid to the General
Partners Following the Acquisition":
S-11
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------- Quarter Ended
1996 1997 1998 March 31, 1999
-------- ------- -------- --------------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the
General Partners and Affiliates:
General Partner Distributions........ -- -- -- --
Accounting and Administrative
Services............................ $ 83,563 $80,145 $ 94,611 $24,480
Broker/Dealer Commissions............ -- -- -- --
Due Diligence and Marketing Support
Fees................................ -- -- -- --
Acquisition Fees..................... -- -- -- --
Asset Management Fees................ -- -- -- --
Real Estate Disposition Fees(1)...... 34,500 -- 65,400 --
-------- ------- -------- -------
Total historical................... $118,063 $80,145 $160,011 $24,480
Pro Forma Distributions to be Paid to
the General Partners Following the
Acquisition:
Cash Distributions on APF Shares..... -- -- -- --
Salary Compensation.................. -- -- -- --
-------- ------- -------- -------
Total pro forma.................... -- -- -- --
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to certain minimum
returns to the Limited Partners. To date, no such fees have been paid since
the required minimum returns have not been made to the Limited Partners.
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
contained herein under the caption "Financial Statements" and in the
Prospectus/Consent Solicitation Statement under the caption "Summary--Our
Reasons for Supporting the Acquisition--Prices for Income Fund Units."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31, 1999
-------------------------- --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income..... $690 $665 $566 $688 $ 614 $200 $106
Distributions from Sales of
Properties................... -- -- -- -- 735 -- --
Distributions from Return of
Capital(1)................... 230 255 354 232 186 -- 71
---- ---- ---- ---- ------ ---- ----
Total....................... $920 $920 $920 $920 $1,535 $200 $177
==== ==== ==== ==== ====== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from certain non-cash
items. This amount is not required to be presented as a return of capital
except for purposes of this table, and the Income Fund has not treated this
amount as a return of capital for any other purpose.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses during 1999. Thus, the pro forma information regarding
the distributions to APF stockholders for the quarter ended March 31, 1999 is
not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
S-12
<PAGE>
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the Acquisition
with those of several alternatives, the Acquisition is more economically
attractive to you and the other Limited Partners than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to certain closing conditions. Second, if your Income Fund is acquired
all Limited Partners of your Income Fund who vote against the Acquisition will
be given the option of receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others, that we will be relieved
from certain ongoing liabilities with respect to the Income Fund if it is
acquired by APF. For a further discussion of the conflicts of interest and
potential benefits the of the Acquisition to us, see "Conflicts of Interest"
below.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the values of the
consideration which would have been received by you and the other Limited
Partners in alternative transactions and concluded that the Acquisition is fair
based on such comparison. In addition, we believe the Acquisition is the best
way to maximize the return on your investment because of your ability to
participate in the potential appreciation of APF Shares. Since the investment
in your Income Fund is an investment in a static portfolio due to the
restrictions contained in your Income Fund's partnership agreement and limited
capital resources, your investments have less of an opportunity to appreciate.
Because APF is a growth-oriented operating company, you, as an APF stockholder,
will have the opportunity to participate in APF's future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms
S-13
<PAGE>
underlying our belief as to fairness are partially based upon the appraisal of
your Income Fund's restaurant properties prepared by Valuation Associates and
upon the fairness opinion provided by Legg Mason. A copy of the fairness
opinion is attached hereto as Appendix A. We encourage you to read it. We
attributed significant weight to the appraisal of Valuation Associates and the
fairness opinions of Legg Mason, which we believe support our conclusion that
the Acquisition is fair to the Limited Partners. We do not know of any factors
that would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinions of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., an affiliate of CNL Group, Inc., and (3) Valuation
Associates has previously performed valuation appraisals for APF. See "Reports,
Opinions and Appraisals" in the consent solicitation.
On rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Funds, Legg
Mason did not address or render any opinion with respect to, any other aspect
of the Acquisition, including:
. the value or fairness of the notes option;
. the prices at which the APF Shares may trade following the Acquisition
or the trading value of the APF Shares to be offered compared with the
current fair market value of the Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Legg Mason's opinion also does not compare the relative merits of the
Acquisition with those of any other transaction or business strategy which were
or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of the Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares will exceed the going concern value and
liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Net Book Value of the Income Fund. We calculated the book value of your
Income Fund under generally accepted accounting principles, or GAAP, as of
March 31, 1999 per average $10,000 original
S-14
<PAGE>
investment. Since the calculation of the book value was done on a GAAP basis,
it is primarily based on historical cost and, therefore it is not indicative of
the true fair market value of your Income Fund. This figure was compared to
three other figures:
(1) the value of the Income Fund if it commenced an orderly liquidation
of its investment portfolio on December 31, 1998,
(2) the value of the Income Fund if it continued to operate in
accordance with its existing partnership agreement and business plans, and
(3) the estimated value of the APF Shares, based on the exchange value,
paid to each Income Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated Value
Original of APF Shares
Limited Partner per Average
Investments Less Going $10,000 Original
any Distributions GAAP Book Liquidation Concern Limited Partner
of Sales Proceeds(1) Value Value(2) Value(2) Investment
-------------------- --------- ----------- -------- ----------------
<S> <C> <C> <C> <C> <C>
CNL Income Fund V, Ltd.. $8,903 $6,572 $7,524 $8,085 $8,100
</TABLE>
- --------
(1) This column reflects, as of December 31, 1998, an adjustment to the Limited
Partners' original average $10,000 investment based on distributions of net
sales proceeds received from sales of restaurant properties (both as a
special distribution and those that were added to working capital and
subsequently distributed).
(2) Liquidation and going concern values were based on appraisals prepared by
Valuation Associates. For a complete description of the methodologies
employed by Valuation Associates, see "Reports, Opinions and Appraisals" in
the consent solicitation.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have contractual
obligations pursuant to your Income Fund's partnership agreement as well as
state law to assess whether the terms of the Acquisition are fair and equitable
to the Limited Partners of your Income Fund without regard to whether the
Acquisition is fair and equitable to any of the other participants, including
the Limited Partners in other Income Funds. James M. Seneff, Jr. and Robert A.
Bourne act as the individual general partners of all of the Income Funds and
also as members of the Board of Directors of APF. While Messrs. Seneff and
Bourne have sought faithfully to discharge their obligations to your Income
Fund, there is an inherent conflict of interest in serving, directly or
indirectly, in a similar capacity with respect to your Income Fund and also on
APF's Board of Directors.
Lack of Independent Representation
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We have
been the parties responsible for structuring all the terms and conditions of
the Acquisition. Legal counsel engaged to assist with the preparation of the
documentation for the Acquisition, including this consent solicitation, was
engaged by us and did not serve, or purport to serve, as legal counsel for the
Income Funds or Limited Partners. If an independent representative
S-15
<PAGE>
had been retained for the Income Funds, the terms of the Acquisition may have
been different and possibly more favorable to the Limited Partners. In
particular, had separate representation for each of the Income Funds been
arranged by us, issues unique to the value of each of the specific Income Funds
might have been highlighted or received greater attention, resulting in
adjustments to the value assigned to the assets of such Income Funds and
increasing the number of APF Shares or notes that would be allocable to such
Income Fund if acquired in the Acquisition.
Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive two material benefits. These benefits include:
. James M. Seneff, Jr. and Robert A. Bourne (your individual general
partners), will continue to serve as directors of APF with Mr. Seneff
serving as Chairman of APF and Mr. Bourne serving as Vice Chairman.
Furthermore, they will be entitled to receive performance-based
incentives, including stock options, under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of the Income Funds, we are legally liable for all
of Income Funds liabilities to the extent that the Income Funds are
unable to satisfy such liabilities. Because the partnership agreement
for each Income Fund prohibits the Income Funds from incurring
indebtedness, the only liabilities the Income Funds have are liabilities
with respect to their ongoing business operations. In the event that one
or more Income Funds are acquired by APF, we would be relieved of our
legal obligation to satisfy the liabilities of the acquired Income Fund
or Income Funds.
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Certain Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund. If
your Income Fund is acquired by APF, and you have voted "For" the Acquisition,
you will receive APF Shares. If you have voted "Against" the Acquisition but
your Income Fund is acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
S-16
<PAGE>
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under certain circumstances, even
if APF were to make the same level of distributions as your Income Fund, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you. For certain other differences attributable to APF's status as a REIT,
see "--Taxation of APF" and "--Taxation of Stockholders--Taxable Domestic
Stockholders" in the consent solicitation.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain and loss based on the
exchange value, for an average $10,000 original Limited Partner investment in
your Income Fund, is set forth in the table below for those Limited Partners
subject to federal income taxation.
<TABLE>
<CAPTION>
Estimated Gain/(Loss) per
Average $10,000 Original
Limited Partner Investment(1)
-----------------------------
<S> <C>
CNL Income Fund V, Ltd. .......................... $230
</TABLE>
- --------
(1) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be significantly below the exchange value.
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one more individuals or entities in exchange for the stock of that corporation,
and (2) immediately after the exchange, such individuals or entities are in
control of the corporation. For purposes of section 351(a), control is defined
as the ownership of stock possessing at least 80 percent of the total combined
voting power of all classes of stock entitled to vote and at least 80 percent
of the total number of shares of all other classes of stock of the corporation.
APF has represented to Shaw Pittman, APF's tax counsel, that, following the
Acquisition, the Limited Partners of the Income Funds will not own stock
possessing at least 80 percent of the total combined voting power of all
classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if any,
assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's
S-17
<PAGE>
assets. Because the principal portion of the notes will not be due until ,
2004, the acquisition of your Income Fund's assets, in part, in exchange for
notes will be reported under the installment sales method and a portion of your
Income Fund's gain may be deferred under the "installment sale" rules. Pursuant
to this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses that
you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive cash and Notes rather than APF
Shares. Even though a Limited Partner's election of the Cash/Notes Option may
decrease the amount of gain your Income Fund recognizes, the electing Limited
Partner still will be required to take into account his, her or its share of
your Income Fund's gain as determined under the partnership agreement of your
Income Fund. Therefore, Limited Partners who elect the notes may recognize gain
in the year of the Acquisition despite the fact that they will not receive cash
with which to pay the tax on the gain. Such Limited Partners will adjust the
basis of the Notes as described below, and the resulting increase in basis will
decrease the amount of the gain recognized over the term of the notes by the
Limited Partners electing to receive notes. See "--Tax Consequences of
Liquidation and Termination of Your Income Fund" below.
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Income Fund is acquired by APF, your Income Fund will be deemed to have been
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition, including gain or loss resulting from the Acquisition. If
your taxable year is not the calendar year, you could be required to recognize
as income in a single taxable year your share of your Income Fund's income
attributable to more than one of its taxable years.
S-18
<PAGE>
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units, reduced. Your holding
period for the notes for purposes of determining capital gain or loss from the
disposition of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17) or
(20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds that are acquired
by APF will equal the fair market value of the APF Shares, plus the issue price
of the notes issued in the Acquisition, plus the amount of any liabilities of
the Income Funds assumed by APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
For a discussion of the taxation of APF, see "Federal Income Tax
Considerations--Taxation of APF" in the consent solicitation.
S-19
<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 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 2,307,364 1,391,466 8,137 (2,450,663)(b),(c)
Interest and
Other Income..... 2,214,763 0 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 0 1,095,269 2,563,714 1,323,577 64,186 (377,734)(e)
Management and
Advisory Fees.... 697,364 0 697,364 0 0 611,196 (1,308,560)(f)
Fees to Related
Parties.......... 0 0 0 23,326 292,575 0 (292,786)(g)
Interest
Expense.......... 0 0 0 50,730 0 4,769,268 0
State Taxes...... 235,208 0 235,208 0 0 0 0
Depreciation--
Other............ 0 0 0 39,581 26,238 0 0
Depreciation--
Property......... 1,548,813 349,465(a) 1,898,278 0 0 0 0
Amortization..... 7,368 0 7,368 0 0 0 541,147 (h)
Transaction
Costs............ 125,926 0 125,926 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
Total Expenses.. 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650 (1,437,933)
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) $ (950,662)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 0 17,271 0 0 0 0
Gain on Sale of
Properties....... 0 0 0 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 (215,797) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
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) (950,662)
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) $(1,199,341)
=========== ========== =========== ========== ========== ========== ===========
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund V, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $14,523,161 $ 338,931 $ 5,177 (j) $14,867,269
Fees............. 1,256,304 0 ( 13,654)(k) 1,242,650
Interest and
Other Income..... 7,687,325 58,654 0 7,745,979
------------ ---------- ------------------ ------------
Total Revenue... $23,466,790 $397,585 $ (8,477) $23,855,898
Expenses:
General and
Administrative... 4,669,012 49,311 ( 24,087)(l),(m) 4,694,236
Management and
Advisory Fees.... 0 0 0 n) 0
Fees to Related
Parties.......... 23,115 0 0 23,115
Interest
Expense.......... 4,819,998 0 0 4,819,998
State Taxes...... 235,208 5,957 4,179 (o) 245,344
Depreciation--
Other............ 65,819 0 0 65,819
Depreciation--
Property......... 1,898,278 64,112 27,618 (p) 1,990,008
Amortization..... 548,515 0 0 548,515
Transaction
Costs............ 125,926 31,470 0 157,396
------------ ---------- ------------------ ------------
Total Expenses.. 12,385,871 150,850 7,710 12,544,431
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties and
Provision for
Losses on
Properties....... $11,080,919 $ 246,735 $ (16,187) $11,311,467
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 61,223 (8,290)(q) 70,204
Gain on Sale of
Properties....... 0 395,113 0 395,113
Provision For
Loss on
Properties....... (215,797) 0 0 (215,797)
------------ ---------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 10,882,393 703,071 (24,477) 11,560,987
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ---------- ------------------ ------------
Net
Earnings(Losses).. $10,882,393 $ 703,071 $ (24,477) $11,560,987
============ ========== ================== ============
</TABLE>
S-20
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustment Subtotal Advisor Services, Inc. Corp. Adjustments
------------ ----------- ------------ ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 513 29 542 n/a n/a n/a n/a
============ =========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 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
============ =========== ============ ========== ========== ============ ===========
Weighted average
units
outstanding
during period... n/a n/a n/a n/a n/a n/a n/a
============ =========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,401 n/a 37,347,401 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 n/a 37,348,464 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... 14,237,405 n/a n/a n/a n/a n/a n/a
Cash
distributions
declared per
$10,000
Investment...... 191 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)
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 $31,175,623 (v1),(w)
Total
liabilities/minority
interest........ $ 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 $31,595,993 (v1),(x)
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund V, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- ------------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 542 23 n/a 565
============== =========== ==================== ==================
Earnings per
share/unit...... $ n/a 14.06 $ n/a $ 0.26
============== =========== ==================== ==================
Book value per
share/unit...... $ n/a $ 328.60 $ n/a $ 16.31
============== =========== ==================== ==================
Dividends per
share/unit...... $ n/a $ 10.00 $ n/a $ n/a
============== =========== ==================== ==================
Ratio of
earnings to
fixed charges... n/a n/a n/a 3.26x
============== =========== ==================== ==================
Weighted average
units
outstanding
during period... n/a 50,000 n/a n/a
============== =========== ==================== ==================
Weighted average
shares
outstanding
during period... 43,497,401 n/a 1,012,516 44,509,917 (r)
============== =========== ==================== ==================
Shares
outstanding..... 43,498,464 n/a 1,012,516 44,510,980
============== =========== ==================== ==================
Cash
distributions
declared:....... n/a 500,000 n/a $ 19,398,642 (s)
==================
Cash
distributions
declared per
$10,000
Investment...... n/a 200 n/a $ 218 (t)
==================
Balance sheet
data:
Real estate
assets, net..... $ 647,547,023 $11,395,479 $5,176,242 (v2) $ 664,118,744
Mortgages/notes
receivable...... $ 289,166,027 $ -- $1,649,736 $ 290,815,763
Receivables,
net............. $ 14,969,032 $ 29,299 $ (268,812)(y) $ 14,729,519
Investment
in/due from
joint ventures.. $ 1,083,564 $ 2,277,228 $ 729,245(y) $ 4,090,037
Total assets.... $1,052,758,945 $17,433,208 $3,551,330 (v2),(y) $1,073,743,483
Total
liabilities/minority
interest........ $ 346,929,801 $ 1,003,035 $ (268,812)(y) $ 347,664,024
Total equity.... $ 705,829,144 $16,430,173 $3,820,142 (v2) $ 726,079,459
</TABLE>
S-21
<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
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<CAPTION>
<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 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
</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>
(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)
<TABLE>
<S> <C>
Amortization of goodwill $541,147
</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 $5,177 in accrued rental income resulting from the straight-
lining of scheduled rent increases throughout the lease terms for the
leases acquired from the Income Fund as if the leases had been acquired
on January 1, 1998.
S-22
<PAGE>
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<S> <C>
Management fees $ 0
Reimbursement of administrative costs (13,654)
--------
$(13,654)
========
</TABLE>
(l) Represents the elimination of $13,654 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $10,433 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports
for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income Fund
to the Advisor.
(o) Represents additional state income taxes of $4,179 resulting from
assuming that acquisitions of properties that had been operational when
APF acquired them from January 1, 1999 through May 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 Fund 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 $27,618 as a result
of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated using
the straight-line method over the remaining useful lives of the
properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $8,290
as a result of adjusting the historical basis of the real estate owned
by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings owned indirectly by the
Income Fund is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(r) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 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 Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Income Fund Total
----------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Shares Offered 3,800,000 2,350,000 1,012,515.75 7,162,515.75
Exchange Value $20 $20 $20 $20
----------- ----------- ------------ ------------
Share Consideration $76,000,000 $47,000,000 $ 20,250,315 $143,250,315
Cash Consideration -- -- 240,000 240,000
APF Transaction Costs 5,668,870 3,505,749 1,528,381 10,703,000
----------- ----------- ------------ ------------
Total Purchase Price $81,668,870 $50,505,749 $ 22,018,696 $154,193,315
=========== =========== ============ ============
Allocation of Purchase
Price:
----------------------
Net Assets --
Historical $ 7,141,252 $10,006,878 $ 16,430,173 $ 33,578,303
Purchase Price
Adjustments:
Land and buildings on
operating leases 4,124,010 4,124,010
Net investment in
direct financing
leases 1,052,232 1,052,232
Investment in joint
ventures 729,245 729,245
Accrued rental income (254,992) (254,992)
Intangibles and other
assets (2,792,876) (61,972) (2,854,848)
Goodwill* 43,291,747 -- 43,291,747
Excess purchase price 74,527,618 -- -- 74,527,618
----------- ----------- ------------ ------------
Total Allocation $81,668,870 $50,505,749 $ 22,018,696 $154,193,315
=========== =========== ============ ============
</TABLE>
--------
*Goodwill represents the portion of the purchase price which is assumed
to relate to the ongoing value of the debt business.
S-23
<PAGE>
The APF Transaction costs of $10,703,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $74,527,618 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 43,291,747 relating to the
acquisition of the CNL Financial Services Group is being amortized over 20
years. APF did not acquire any intangibles as part of any of the
acquisitions. The entries were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1. Common Stock (CFA, CFS, CFC)--Class A 8,600
Common Stock (CFA, CFS, CFC)--Class B 4,825
APIC (CFA, CFS, CFC) 13,857,645
Retained Earnings 3,277,060
Accumulated distributions in excess of earnings 74,527,618
Goodwill for CFC (Intangibles and other assets) 43,291,747
CFC/CFS Org Costs/Other Assets 2,792,876
Cash to pay APF transaction costs 9,174,619
APF Common Stock 61,500
APF APIC 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital 16,430,173
Land and buildings on operating leases 4,124,010
Net investment in direct financing leases 1,052,232
Investment in joint ventures 729,245
Accrued rental income 254,992
Intangibles and other assets 61,972
Cash to pay APF Transaction costs 1,528,381
Cash consideration to Income Funds 240,000
APF Common Stock 10,125
APF APIC 20,240,190
(To record acquisition of Income Fund)
</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 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.
(y) Represents the elimination by the Income Fund of $268,812 in related
party payables recorded as receivables by the Advisor.
S-24
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND V, LTD.
The following table sets forth certain financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund V,
Ltd." in this supplement.
<TABLE>
<CAPTION>
Quarter Ended
March 31, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues(1)............. $ 458,808 $ 518,757 $ 2,024,231 $ 2,147,770 $ 2,279,880 $ 2,314,818 $ 2,354,981
Net income(2)........... 703,071 836,181 1,544,895 1,731,915 1,428,159 1,679,820 1,743,029
Cash distributions
declared(3)............ 500,000 2,338,327 3,838,327 2,300,000 2,300,000 2,300,000 2,300,000
Net income per unit(2).. 13.95 16.58 30.70 34.40 28.31 33.26 34.51
Cash distributions
declared per unit(3)... 10.00 46.77 76.77 46.00 46.00 46.00 46.00
GAAP book value per
unit................... 328.60 340.37 324.54 370.41 379.65 393.90 405.67
Weighted average number
of Limited Partner
units outstanding...... 50,000 50,000 50,000 50,000 50,000 50,000 50,000
<CAPTION>
March 31, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $17,433,208 $19,881,986 $17,135,485 $19,718,430 $20,133,002 $20,760,182 $21,299,865
Total partners'
capital................ 16,430,173 17,018,388 16,227,102 18,520,534 18,982,619 19,694,760 20,283,440
</TABLE>
- --------
(1) Revenues include equity in earnings of unconsolidated joint ventures and
minority interest in income or loss of the consolidated joint venture.
(2) Net income for the quarters ended March 1999 and March 1998 includes gain
on sale of land and buildings of $395,113 and $441,613 respectively. Net
income for the year ended December 31, 1998 includes $469,613, from gains
on sales of land and buildings, $25,500 from a loss on sale of land and
building and $403,157 for a provision for loss on land and building. Net
income for the year ended December 31, 1997, includes $550,878 from gains
on the sales of land and buildings, $141,567 from a loss on the sale of
land and building and $250,694 for a provision for loss on land and
building. Net income for the year ended December 31, 1996, includes $19,369
from the gains on sale of land and buildings and $239,525 for a provision
for loss on land and buildings. Net income for the year ended December 31,
1995, includes $5,924 from a gain on sale of land and building.
(3) Distributions for the quarter ended March 31, 1998, and the year ended
December 31, 1998 include a special distribution to the Limited Partners of
1,838,327 as a result of the distribution of net sales proceeds from the
sales of restaurant properties during 1999 and 1998.
S-25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND V, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
August 17, 1988, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurant properties, as
well as land upon which restaurants were to be constructed, which are leased
primarily to operators of national and regional fast-food and family-style
restaurant chains. The leases are generally triple-net leases, with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of 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
S-26
<PAGE>
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,
S-27
<PAGE>
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
S-28
<PAGE>
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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<PAGE>
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>
S-37
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998...... F-1
Condensed Statements of Income for the Quarters Ended March 31, 1999
and 1998................................................................ F-2
Condensed Statements of Partner's Capital for the Quarter Ended March 31,
1999 and for the Year Ended December 31, 1998........................... F-3
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998................................................................ F-4
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1998 and 1997........................................................... F-5
Report of Independent Accountants........................................ F-8
Balance Sheets as of December 31, 1998 and 1997.......................... F-9
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-10
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-11
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-12
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-13
Unaudited Pro Forma Financial Information................................ F-24
Unaudited Pro Forma Balance Sheet as of March 31, 1999................... F-25
Unaudited Pro Forma Statement of Earnings for the Quarter Ended March 31,
1999.................................................................... F-27
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998.................................................................... F-29
Unaudited Pro Forma Statement of Cash Flows for the Quarter Ended
March 31, 1999.......................................................... F-31
Unaudited Pro Forma Statement of Cash Flows for the Year Ended
December 31, 1998....................................................... F-33
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements.............................................................. F-35
</TABLE>
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
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-1
<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-2
<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-3
<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-4
<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-5
<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-6
<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. 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-7
<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-8
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and buildings.................................... $10,660,128 $12,421,143
Net investment in direct financing leases.............. 1,708,966 2,277,481
Investment in joint ventures........................... 2,282,012 1,558,709
Mortgage notes receivable, less deferred gain.......... 1,748,060 1,758,167
Cash and cash equivalents.............................. 352,648 1,361,290
Receivables, less allowance for doubtful accounts of
$141,505 and $137,892................................. 87,490 108,261
Prepaid expenses....................................... 1,872 9,307
Accrued rental income.................................. 239,963 169,726
Other assets........................................... 54,346 54,346
----------- -----------
$17,135,485 $19,718,430
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 7,546 $ 24,229
Accrued construction costs payable..................... -- 125,000
Accrued and escrowed real estate taxes payable......... 10,361 93,392
Distributions payable.................................. 500,000 575,000
Due to related parties................................. 228,448 143,867
Rents paid in advance and deposits..................... 6,112 13,479
----------- -----------
Total liabilities.................................. 752,467 974,967
Minority interest...................................... 155,916 222,929
Partners' capital...................................... 16,227,102 18,520,534
----------- -----------
$17,135,485 $19,718,430
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
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-10
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
----------------- -------------------------------------------------
Accumu- Accumu-
Contri- lated Contri- Distri- lated Syndication
butions Earnings butions butions Earnings Costs Total
-------- -------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $ 77,500 $126,460 $25,000,000 $(15,168,240) $12,524,040 $(2,865,000) $19,694,760
Contributions from
general partner....... 159,700 -- -- -- -- -- 159,700
Distributions to
limited partners ($46
per limited partner
unit)................. -- -- -- (2,300,000) -- -- (2,300,000)
Net income............. -- 12,513 -- -- 1,415,646 -- 1,428,159
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 237,200 138,973 25,000,000 (17,468,240) 13,939,686 (2,865,000) 18,982,619
Contributions from
general partner....... 106,000 -- -- -- -- -- 106,000
Distributions to
limited partners ($46
per limited partner
unit)................. -- -- -- (2,300,000) -- -- (2,300,000)
Net income............. -- 11,809 -- -- 1,720,106 -- 1,731,915
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 343,200 150,782 25,000,000 (19,768,240) 15,659,792 (2,865,000) 18,520,534
Distributions to
limited partners ($77
per limited partner
unit)................. -- -- -- (3,838,327) -- -- (3,838,327)
Net income............. -- 9,748 -- -- 1,535,147 -- 1,544,895
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $343,200 $160,530 $25,000,000 $(23,606,567) $17,194,939 $(2,865,000) $16,227,102
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............. $ 1,490,412 $ 1,771,467 $ 2,083,722
Distributions from unconsolidated joint
ventures.............................. 215,839 53,176 53,782
Cash paid for expenses................. (331,363) (305,341) (161,730)
Interest received...................... 274,847 293,929 127,971
----------- ----------- -----------
Net cash provided by operating
activities........................... 1,649,735 1,813,231 2,103,745
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
buildings............................. 2,125,220 5,271,796 100,000
Additions to land and buildings on
operating leases...................... (125,000) (1,900,790) --
Investment in direct financing leases.. -- (911,072) --
Investment in joint ventures........... (765,201) (1,090,062) --
Collections on mortgage notes
receivable............................ 19,931 9,265 6,712
Other.................................. -- -- (26,287)
----------- ----------- -----------
Net cash provided by investing
activities........................... 1,254,950 1,379,137 80,425
----------- ----------- -----------
Cash Flows from Financing Activities:
Contributions from general partner..... -- 106,000 159,700
Distributions to limited partners...... (3,913,327) (2,300,000) (2,300,000)
----------- ----------- -----------
Net cash used in financing
activities........................... (3,913,327) (2,194,000) (2,140,300)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ (1,008,642) 998,368 43,870
Cash and Cash Equivalents at Beginning
of Year................................ 1,361,290 362,922 319,052
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 352,648 $ 1,361,290 $ 362,922
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 1,544,895 $ 1,731,915 $ 1,428,159
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense....................... 5,882 9,007 --
Depreciation........................... 267,254 324,431 376,766
Minority interest in loss of
consolidated joint venture............ (67,013) (54,622) (23,884)
Equity in earnings of unconsolidated
joint ventures, net of distributions.. 41,898 (2,839) 7,330
Gain on sale of land and buildings..... (444,113) (409,311) (19,369)
Provisions for loss on land and
buildings............................. 403,157 250,694 239,525
Decrease in net investment in direct
financing leases...................... 38,017 42,682 46,387
Decrease (increase) in accrued interest
on mortgage note receivable........... (6,533) 6,788 (9,414)
Decrease (increase) in receivables..... 17,333 (43,006) 10,270
Decrease in prepaid expenses........... 7,435 1,109 1,505
Increase in accrued rental income...... (70,237) (19,527) (27,875)
Increase (decrease) in accounts payable
and accrued expenses.................. (100,554) (12,509) 32,032
Increase (decrease) in due to related
parties............................... 19,181 (13,322) 59,945
Increase (decrease) in rents paid in
advance and deposits.................. (6,867) 1,741 (17,632)
----------- ----------- -----------
Total adjustments..................... 104,840 81,316 675,586
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 1,649,735 $ 1,813,231 $ 2,103,745
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Mortgage note accepted in connection
with sale of land and buildings....... $ -- $ -- $ 1,057,299
=========== =========== ===========
Deferred real estate disposition fees
incurred and unpaid at end of year.... $ 65,400 $ -- $ 34,500
=========== =========== ===========
Distributions declared and unpaid at
December 31........................... $ 500,000 $ 575,000 $ 575,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund V, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset)
(Note 4). Unearned income is deferred and amortized to income over the
lease terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to their fair
value. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
estimate of net cash flows expected to be generated from its properties and the
need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income are
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to
F-13
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
decrease rental or other income or increase bad debt expense for the current
period, although the Partnership continues to pursue collection of such
amounts. If amounts are subsequently determined to be uncollectible, the
corresponding receivable and allowance for doubtful accounts are decreased
accordingly.
Investment in Joint Ventures--The Partnership accounts for its 66.5%
interest in CNL/Longacre Joint Venture, a Florida general partnership, using
the consolidation method. Minority interest represents the minority joint
venture partner's proportionate share of the equity in the Partnership's
consolidated joint venture. All significant intercompany accounts and
transactions have been eliminated.
The Partnership accounts for its interest in Cocoa Joint Venture, Halls
Joint Venture, RTO Joint Venture and a property in each of Mesa, Arizona and
Vancouver, Washington, held as tenants-in-common with affiliates, using the
equity method since the Partnership shares control with affiliates which have
the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and properties.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of estimates relate to
the allowance for doubtful accounts and future cash flows associated with long-
lived assets. Actual results could differ from those estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
2. Leases:
The Partnership leases its land and buildings primarily to operators of
national and regional fast-food and family-style restaurants. The leases are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 13, "Accounting for Leases." The leases generally are classified
as operating leases;
F-14
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
however, some leases have been classified as direct financing leases.
Substantially all leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant generally pays all property taxes
and assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew the
leases for two to five successive five-year periods subject to the same terms
and conditions as the initial lease. Most leases also allow the tenant to
purchase the property at fair market value after a specified portion of the
lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................ $ 5,352,136 $ 6,069,665
Buildings....................................... 7,857,598 8,546,530
----------- -----------
13,209,734 14,616,195
Less accumulated depreciation................... (1,895,755) (1,944,358)
----------- -----------
11,313,979 12,671,837
Less allowance for loss on land and buildings... (653,851) (250,694)
----------- -----------
$10,660,128 $12,421,143
=========== ===========
</TABLE>
In January 1997, the Partnership sold its property in Franklin, Tennessee,
to the tenant for $980,000 and received net sales proceeds of $960,741. Since
the Partnership had established an allowance for loss on land and building as
of December 31, 1996, no loss was recognized during 1997 as a result of the
sale. The Partnership used $360,000 of the net sales proceeds to pay
liabilities of the Partnership, including quarterly distributions to the
limited partners.
In June 1997, the Partnership entered into an operating agreement for the
property located in South Haven, Michigan, with an operator to operate the
property as an Arby's restaurant. In connection therewith, the Partnership used
approximately $120,400 of the net sales proceeds from the sale of the property
in Franklin, Tennessee, for conversion costs associated with the Arby's
property. The Partnership reinvested the majority of the remaining net sales
proceeds in additional properties.
During 1997, the Partnership sold its properties in Salem, New Hampshire;
Port St. Lucie, Florida; and Tampa, Florida for a total of $3,365,172 and
received net sales proceeds totalling $3,291,566 resulting in a total gain of
$447,521 for financial reporting purposes. These properties were originally
acquired by the Partnership in 1989 and had total costs of approximately
$2,934,400, excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the Partnership sold the properties for approximately $357,300 in
excess of their original purchase prices. The Partnership reinvested the
majority of net sales proceeds in additional properties.
In November 1997, the Partnership sold its property in Richmond, Indiana, to
a third party for $400,000 and received net sales proceeds of $385,179. As a
result of this transaction, the Partnership recognized a loss of $141,567 for
financial reporting purposes. In December 1997, the Partnership reinvested the
net sales proceeds in a property located in Vancouver, Washington, as tenants-
in-common with affiliates of the general partners (see Note 5).
F-15
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
During the year ended December 31, 1998, the Partnership sold its properties
in Port Orange, Florida, and Tyler, Texas to the tenants for a total of
$2,180,000 and received net sales proceeds totalling $2,125,220, resulting in a
total gain of $440,822 for financial reporting purposes. These properties were
originally acquired by the Partnership in 1988 and 1989 and had costs totaling
approximately $1,791,300, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold these properties for a
total of approximately $333,900 in excess of their original purchase prices. In
connection with the sale of the properties, the Partnership incurred deferred,
subordinated, real estate disposition fees of $65,400 (see Note 10).
In July 1997, the Partnership entered into a new lease for the property in
Connorsville, Indiana, with a new tenant to operate the property as an Arby's
restaurant. In connection therewith, during 1998, the Partnership paid $125,000
in renovation costs.
In 1997, the Partnership established an allowance for loss on land and
buildings of $250,694, for financial reporting purposes, relating to the
properties in Belding, Michigan and Lebanon, New Hampshire. Due to the fact
that the Partnership has not been able to successfully re-lease these
properties, the Partnership increased the allowance by $155,612 for the
property in Belding, Michigan, and $122,875 for the property in Lebanon, New
Hampshire, owned by the Partnership's consolidated joint venture, CNL/Longacre
Joint Venture at December 31, 1998. In addition, at December 31, 1998, the
Partnership established an allowance for loss on land and building of $124,670
relating to the property located in Daleville, Indiana, due to the fact that
the tenant terminated the lease with the Partnership. The allowances represent
the difference between the net carrying values of the properties at December
31, 1998 and current estimates of net realizable values for these properties.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998, 1997, and 1996, the Partnership recognized $70,237, $19,527, and
$27,875, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999........................................................... $ 1,087,538
2000........................................................... 1,101,658
2001........................................................... 1,075,591
2002........................................................... 987,031
2003........................................................... 999,957
Thereafter..................................................... 8,250,965
-----------
$13,502,740
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant gross sales.
F-16
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Minimum lease payments receivable.................. $3,260,110 $4,213,033
Estimated residual values.......................... 566,502 806,792
Less unearned income............................... (2,117,646) (2,742,344)
---------- ----------
Net investment in direct financing leases.......... $1,708,966 $2,277,481
========== ==========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................ $ 220,518
2000............................................................ 220,518
2001............................................................ 220,518
2002............................................................ 220,518
2003............................................................ 220,518
Thereafter...................................................... 2,157,520
----------
$3,260,110
==========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
In May 1997, the Partnership sold its property in Smyrna, Tennessee, to a
third party for $655,000 and received net sales proceeds of $634,310, resulting
in a gain of $101,995 for financial reporting purposes. This property was
originally acquired by the Partnership in March 1989 and had a cost of
approximately $569,500, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $64,800 in excess of its original purchase price. The Partnership
used approximately $82,500 of the net sales proceeds to pay liabilities of the
Partnership, including quarterly distributions to the limited partners. In
addition, the Partnership reinvested the remaining net sales proceeds in
additional properties as tenants-in-common with affiliates of the general
partners.
In June 1998, the Partnership terminated its lease with the tenant of the
property in Daleville, Indiana. As a result, the Partnership reclassified these
assets from net investment in direct financing lease to land and building on
operating lease. In accordance with Statement of Financial Accounting Standards
#13, "Accounting for Leases," the Partnership recorded the reclassified assets
at the lower of original cost, present fair value, or present carrying value.
No loss on termination of direct financing lease was recorded for financial
reporting purposes.
5. Investment in Joint Ventures:
As of December 31, 1998, the Partnership had a 43 percent and a 48.9%
interest in the profits and losses of Cocoa Joint Venture and Halls Joint
Venture, respectively. The remaining interests in these joint ventures are held
by affiliates of the Partnership which have the same general partners.
F-17
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In October 1997, the Partnership used a portion of the net sales proceeds
from the sale of the Property in Smyrna, Tennessee to acquire a property in
Mesa, Arizona, as tenants-in-common with an affiliate of the general partners.
The Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with an affiliate, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 42.09% interest in this property.
In addition, in December 1997, the Partnership used some or all of the net
sales proceeds from the sales of the Properties in Franklin, Tennessee;
Richmond, Indiana, and Smyrna, Tennessee to acquire a property in Vancouver,
Washington, as tenants-in-common with affiliates of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with an affiliate, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 27.78% interest in this property.
In May, 1998, the Partnership entered into a joint venture arrangement, RTO
Joint Venture, with an affiliate of the general partners, to construct and hold
one restaurant property. Construction was completed and rent commenced in
December 1998. As of December 31, 1998, the Partnership had contributed
$766,746 to the joint venture. The Partnership holds a 53.12% interest in the
profits and losses of the joint venture. The Partnership accounts for its
investment in this joint venture under the equity method since the Partnership
shares control with an affiliate.
Cocoa Joint Venture, Halls Joint Venture, RTO Joint Venture and the
Partnership and affiliates as tenants-in-common in two separate tenancy-in-
common arrangements, each own and lease one property to an operator of national
fast-food or family-style restaurants.
The following presents the combined condensed financial information for all
of the Partnership's investments in joint ventures at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................... $4,812,568 $4,277,972
Net investment in direct financing lease............ 817,525 --
Cash................................................ 17,992 24,994
Receivables......................................... 5,168 4,417
Prepaid expenses.................................... 458 270
Accrued rental income............................... 112,279 68,819
Liabilities......................................... 46,398 1,250
Partners' capital................................... 5,719,592 4,375,222
Revenues............................................ 555,103 151,242
Net income.......................................... 454,922 121,605
</TABLE>
The Partnership recognized income totaling $173,941, $56,015, and $46,452
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
6. Mortgage Notes Receivable:
In connection with the sale in 1995 of its property in Myrtle Beach, South
Carolina, the Partnership accepted a promissory note in the principal sum of
$1,040,000, collateralized by a mortgage on the property. The promissory note
bears interest at 10.25% per annum and is being collected in 59 equal monthly
F-18
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
installments of $9,319, including interest, with a balloon payment of $991,332
due in July 2000. As a result of this sale being accounted for using the
installment sales method for financial reporting purposes as required by
Statement of Financial Accounting Standards No. 66, "Accounting for Sales of
Real Estate," the Partnership recognized a gain of $1,134, $1,024, and $924 for
the years ended December 31, 1998, 1997, and 1996, respectively.
In addition, in connection with the sale in 1996 of its property in St.
Cloud, Florida, the Partnership accepted a promissory note in the principal sum
of $1,057,299, representing the balance of the sales price of $1,050,000 plus
tenant closing costs in the amount of $7,299 that the Partnership financed on
behalf of the tenant. The note is collateralized by a mortgage on the property.
The promissory note bears interest at a rate of 10.75% per annum and was being
collected in 12 monthly installments of interest only, and thereafter in
168 equal monthly installments of principal and interest. As a result of this
sale being accounted for using the installment sales method for financial
reporting purposes as required by Statement of Financial Accounting Standards
No. 66, "Accounting for Sales of Real Estate," the Partnership recognized a
gain of $2,157, $338, and $18,445 for the years ended December 31, 1998, 1997,
and 1996, respectively.
The mortgage notes receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Principal balance................................ $2,049,981 $2,069,912
Accrued interest receivable...................... 17,945 11,412
Less deferred gains on sale of land and build-
ings............................................ (319,866) (323,157)
---------- ----------
$1,748,060 $1,758,167
========== ==========
</TABLE>
The general partners believe that the estimated fair values of mortgage
notes receivable at December 31, 1998 and 1997, approximate the outstanding
principal amount based on estimated current rates at which similar loans would
be made to borrowers with similar credit and for similar maturities.
7. Receivables:
In June 1997, the Partnership terminated the leases with the tenant of the
properties in Connorsville and Richmond, Indiana. In connection therewith, the
Partnership accepted a promissory note from the former tenant for $35,297 for
amounts relating to past due real estate taxes the Partnership had accrued as a
result of the former tenant's financial difficulties. The promissory note is
uncollateralized, bears interest at a rate of ten percent per annum, and is
being collected in 36 monthly installments. Receivables at December 31, 1998
and 1997, included $25,783 and $37,099, respectively of such amounts, including
accrued interest of $1,802 in 1997.
8. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
F-19
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their 10%
Preferred Return, plus the return of their adjusted capital contributions. The
general partners will then receive, to the extent previously subordinated and
unpaid, a one percent interest in all prior distributions of net cash flow and
a return of their capital contributions. Any remaining sales proceeds will be
distributed 95 percent to the limited partners and five percent to the general
partners.
Any gain from the sale of a property not in liquidation of the Partnership
is, in general, allocated in the same manner as net sales proceeds are
distributable. Any loss from the sale of a property is, in general, allocated
first, on a pro rata basis, to partners with positive balances in their capital
accounts; and thereafter, 95 percent to the limited partners and five percent
to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the year ended December 31, 1998, the Partnership declared
distributions to the limited partners of $3,838,327, and during each of the
years ended December 31, 1997 and 1996, the Partnership distributed $2,300,000.
Distributions for 1998 included $1,838,327 as a result of the distribution of
net sales proceeds from the 1997 and 1998 sales of the properties in Tampa and
Port Orange, Florida. This amount was applied toward the limited partners' 10%
Preferred Return. No distributions have been made to the general partners to
date.
F-20
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
9. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................. $1,544,895 $1,731,915 $1,428,159
Depreciation for tax reporting
purposes less than (in excess of)
depreciation for financial
reporting purposes................... 18,802 (23,618) (28,058)
Gain on disposition of land and
buildings for financial reporting
purposes in excess of gain for tax
reporting purposes................... (16,347) (354,648) (1,606)
Allowance for loss on land and
buildings............................ 403,157 250,694 239,525
Direct financing leases recorded as
operating leases for tax reporting
purposes............................. 38,017 42,682 46,387
Equity in earnings of unconsolidated
joint ventures for tax reporting
purposes in excess of (less than)
equity in earnings of unconsolidated
joint ventures for financial
reporting purposes................... 10,795 (1,914) (1,900)
Capitalization of transaction costs
for tax reporting purposes........... 14,644 -- --
Allowance for doubtful accounts....... 3,613 100,149 33,254
Accrued rental income................. (70,237) (19,527) (27,875)
Capitalization of administrative
expenses for tax reporting purposes.. 22,990 -- --
Rents paid in advance................. (6,867) 1,241 (17,632)
Minority interest in temporary
differences of consolidated joint
venture.............................. (84,622) (41,515) (343)
Other................................. 1,705 36,721 --
---------- ---------- ----------
Net income for federal income tax
purposes............................. $1,880,545 $1,722,180 $1,669,911
========== ========== ==========
</TABLE>
10. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors,
Inc. (hereinafter referred to as the "Affiliate") performed certain services
for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate an annual, noncumulative, subordinated management fee of
one percent of the sum of gross revenues from properties wholly owned by the
Partnership and the Partnership's allocable share of gross revenues from joint
ventures, but not in excess of competitive fees for comparable services in the
same geographic area. These fees will be incurred and will be payable only
after the limited partners receive their 10% Preferred Return. Due to the fact
that these fees are noncumulative, if the limited partners do not
F-21
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
receive their 10% Preferred Return in any particular year, no management fees
will be due or payable for such year. As a result of such threshold, no
management fees were incurred during the years ended December 1998, 1997, and
1996.
The Affiliate of the Partnership is also entitled to receive a deferred,
subordinated real estate disposition fee, payable upon the sale of one or more
properties based on the lesser of one-half of a competitive real estate
commission or three percent of the sales price if the Affiliate provides a
substantial amount of services in connection with the sale. However, if the net
sales proceeds are reinvested in a replacement property, no such real estate
disposition fees will be incurred until such replacement property is sold and
the net sales proceeds are distributed. The payment of the real estate
disposition fee is subordinated to receipt by the limited partners of their
aggregate 10% Preferred Return, plus their adjusted capital contributions.
During the years ended December 31, 1998 and 1996, the Partnership incurred a
deferred, subordinated real estate disposition fee of $65,400 and $34,500,
respectively, as the result of the sale of the properties during 1998 and 1996,
respectively. No deferred, subordinated real estate disposition fee was
incurred for the year ended December 31, 1997 due to the reinvestment of net
sales proceeds in additional properties.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $94,611, $80,145, and $83,563 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
During 1997, the Partnership and an affiliate of the general partners
acquired a property in Mesa, Arizona, as tenants-in-common for a purchase price
of $1,084,111 (of which the Partnership contributed $460,911 or 42.23%) from
CNL BB Corp., also an affiliate of the general partners. CNL BB Corp. had
purchased and temporarily held title to this property in order to facilitate
the acquisition of the property by the Partnership. The purchase price paid by
the Partnership represented the Partnership's percent of interest in the costs
incurred by CNL BB Corp. to acquire and carry the property, including closing
costs.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership.... $ 77,907 $ 67,106
Accounting and administrative services................ 50,641 42,261
Deferred, subordinated real estate disposition fee.... 99,900 34,500
-------- --------
$228,448 $143,867
======== ========
</TABLE>
11. Concentration of Credit Risk:
The following schedule presents total rental and earned income (including
mortgage interest income) from individual lessees, or affiliated groups of
lessees, each representing more than ten percent of the Partnership's total
rental and earned income (including the Partnership share of total rental and
earned income from unconsolidated joint ventures and the properties held as
tenants-in-common with affiliates), for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation...................... $195,511 $195,511 $ N/A
Shoney's, Inc.................................. N/A 229,795 241,119
</TABLE>
F-22
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In addition, the following schedule presents total rental and earned income
(including mortgage interest income) from individual restaurant chains, each
representing more than ten percent of the Partnership's total rental and earned
income and mortgage interest income (including the Partnership's share of total
rental and earned income from joint ventures and the properties held as
tenants-in-common with affiliates) for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Wendy's Old Fashioned Hamburger Restaurant.... $220,347 $302,253 $293,817
Golden Corral Family Steakhouse............... 195,511 N/A N/A
Denny's....................................... N/A 312,510 310,021
Perkins....................................... N/A 228,492 268,939
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income (including mortgage interest
income).
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains, could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
12. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 2,049,031 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $20,212,956 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
13. Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 12 being adjusted to 1,024,516 shares valued at $20.00 per
APF share.
F-23
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of the Advisor
and the CNL Restaurant Financial Services Group, and the acquisition of the
Income Fund (the acquisition of the Income Fund is referred to as the
"Acquisition"), and is based on estimates and assumptions set forth below in
the notes to such information which included pro forma adjustments. This
unaudited pro forma financial information has been prepared utilizing the
historical financial statements of APF, the historical combined financial
information of the Income Fund, the Advisor and CNL Restaurant Financial
Services Group (shown separately as CFS and CFC) and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, Income Fund, Advisor and CNL Restaurant Financial Services Group. The
pro forma balance sheet assumes that the Acquisition occurred on 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.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As Of March 31, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------ ------------ ------------ ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Land and Building on
operating leases (net
depreciation).......... 475,787,661 58,749,637 (A) 534,537,298 0 0 0
Net Investment in Direct
Financing Leases....... 123,270,117 0 123,270,117 0 0 0
Mortgages and Notes
Receivable............. 41,269,740 0 41,269,740 0 0 247,896,287
Other Investments....... 16,199,792 0 16,199,792 0 0 6,353,482
Investment In Joint
Ventures............... 1,083,564 0 1,083,564 0 0 0
Cash and Cash
Equivalents............ 35,796,119 (25,093,119)(A) 10,703,000 591,712 552,415 4,896,688
Restricted
Cash/Certificates of
Deposit................ 2,007,278 0 2,007,278 0 0 853,243
Receivables (net
allowances)/Due from
Related Party.......... 548,862 0 548,862 7,141,967 5,457,493 1,969,339
Accrued Rental Income... 5,007,334 0 5,007,334 0 0 0
Other Assets............ 7,723,678 0 7,723,678 490,141 298,498 2,731,394
Goodwill................ 0 0 0 0 0 0
------------ ----------- ------------ ---------- ---------- ------------
Total Assets........... $708,694,145 $33,656,518 $742,350,663 $8,223,820 $6,308,406 $264,700,433
============ =========== ============ ========== ========== ============
Liabilities and Equity:
Accounts Payable and
Accrued Liabilities.... $ 3,464,190 $ 0 $ 3,464,190 $ 576,531 $ 304,375 $ 1,613,959
Accrued Construction
Costs Payable.......... 10,172,169 0 10,172,169 0 0 0
Distributions Payable... 0 0 0 119,808 0 0
Due to Related Parties.. 148,629 0 148,629 0 563,724 31,310,681
Income Tax Payable...... 0 0 0 0 0 271,741
Line of Credit/Notes
payable................ 34,150,000 33,656,518 (A) 67,806,518 386,229 0 226,937,481
Deferred Income......... 2,052,530 0 2,052,530 0 0 0
Rents Paid in Advance... 1,340,636 0 1,340,636 0 0 0
Minority Interest....... 280,970 0 280,970 0 0 0
Common Stock............ 373,483 0 373,483 0 0 0
Common Stock--Class A... 0 0 0 6,400 2,000 200
Common Stock--Class B... 0 0 0 3,600 724 501
Additional Paid-in-
capital................ 670,005,177 0 670,005,177 4,617,047 5,303,503 3,937,095
Accumulated
distributions in excess
of net earnings........ (13,293,639) 0 (13,293,639) 2,514,205 134,080 628,775
Partners Capital........ 0 0 0 0 0 0
------------ ----------- ------------ ---------- ---------- ------------
Total Liabilities and
Equity................ $708,694,145 $33,656,518 $742,350,663 $8,223,820 $6,308,406 $264,700,433
============ =========== ============ ========== ========== ============
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of March 31, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund V, Ltd. Adjustments Pro Forma
----------- -------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Assets:
Land and Building on
operating leases (net
depreciation).......... 0 534,537,298 9,695,760 4,124,010 (B2) 548,357,068
Net Investment in Direct
Financing
Leases................. 0 123,270,117 1,699,719 1,052,232 (B2) 126,022,068
Mortgages and Notes
Receivable............. 0 289,166,027 1,649,736 0 290,815,763
Other Investments....... 0 22,553,274 0 0 22,553,274
Investment In Joint
Ventures............... 0 1,083,564 2,277,228 729,245 (B2) 4,090,037
Cash and Cash
Equivalents............ (9,174,619)(B1) 7,569,196 1,764,502 (1,528,381)(B2) 7,565,317
(240,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 0 2,860,521 -- 0 2,860,521
Receivables (net
allowances)/Due from
Related Party.......... (148,629)(C) 14,969,032 29,299 (268,812)(E) 14,729,519
Accrued Rental Income... 0 5,007,334 254,992 (254,992)(B2) 5,007,334
Other Assets............ (2,792,876)(B1) 8,450,835 61,972 (61,972)(B2) 8,450,835
Goodwill................ 43,291,747 (B1) 43,291,747 0 0 43,291,747
----------- -------------- ----------- ------------ --------------
Total Assets........... $31,175,623 $1,052,758,945 $17,433,208 $ 3,551,330 $1,073,743,483
=========== ============== =========== ============ ==============
Liabilities and Equity:
Accounts Payable and
Accrued
Liabilities............ $ 0 $ 5,959,055 $ 44,917 $ 0 $ 6,003,972
Accrued Construction
Costs Payable.......... 0 10,172,169 0 0 10,172,169
Distributions Payable... 0 119,808 500,000 0 619,808
Due to Related Parties.. (148,629)(C) 31,874,405 268,812 (268,812)(E) 31,874,405
Income Tax Payable...... (271,741)(D) 0 0 0 0
Line of Credit/Notes
payable................ 0 295,130,228 0 0 295,130,228
Deferred Income......... 0 2,052,530 0 0 2,052,530
Rents Paid in Advance... 0 1,340,636 37,775 0 1,378,411
Minority Interest....... 0 280,970 151,531 0 432,501
Common Stock............ 61,500 (B1) 434,983 0 10,125 (B2) 445,108
Common Stock--Class A... (8,600)(B1) 0 0 0 0
Common Stock--Class B... (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 122,938,500 (B1) 792,943,677 0 20,240,190 (B2) 813,183,867
(13,857,645)(B1)
Accumulated
distributions in excess
of net earnings........ (3,277,060)(B1) (87,549,516) 0 0 (87,549,516)
(74,527,618)(B1)
271,741
(D)
Partners Capital........ 0 0 16,430,173 (16,430,173)(B2) 0
----------- -------------- ----------- ------------ --------------
Total Liabilities and
Equity................ 31,175,623 1,052,758,945 $17,433,208 $ 3,551,330 $1,073,743,483
=========== ============== =========== ============ ==============
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Historical
Property CNL Historical
Acquisition Financial CNL
Historical Pro Forma Historical Services, Financial
APF Adjustments Subtotal Advisor Inc. Corp.
----------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................. $12,184,008 2,339,153(a) $14,523,161 $ 0 $0 $ 0
Fees.................... 0 0 0 2,307,364 1,391,466 8,137
Interest and Other
Income................. 2,214,763 0 2,214,763 47,213 129,362 5,233,919
----------- ---------- ----------- ---------- ---------- ----------
Total Revenue.......... $14,398,771 $2,339,153 $16,737,924 $2,354,577 $1,520,828 $5,242,056
Expenses:
General and
Administrative
Expenses............... 1,095,269 0 1,095,269 2,563,714 1,323,577 64,186
Management and Advisory
Fees................... 697,364 0 697,364 0 0 611,196
Fees Paid to Related
Parties................ 0 0 0 23,326 292,575 0
Interest Expense........ 0 0 0 50,730 0 4,769,268
State Taxes............. 235,208 0 235,208 0 0 0
Depreciation--Other..... 0 0 0 39,581 26,238 0
Depreciation--Property.. 1,548,813 349,465(a) 1,898,278 0 0 0
Amortization............ 7,368 0 7,368 0 0 0
Transaction Costs....... 125,926 0 125,926 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
Total Expenses......... 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, 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)
Equity Earnings of Joint
Ventures/Minority
Interest............... 17,271 0 17,271 0 0 0
Gain on Sale of
Properties............. 0 0 0 0 0 0
Provision For Loss on
Properties............. (215,797) 0 (215,797) 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
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)
Benefit/(Provision) for
Federal Income Taxes... 0 0 0 127,496 48,017 73,166
----------- ---------- ----------- ---------- ---------- ----------
Net Earnings (Losses)... $10,490,297 $1,989,688 $12,479,985 $ (195,278) $ (73,545) $ (129,428)
=========== ========== =========== ========== ========== ==========
Earnings Per
Share/Unit............. $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ==========
Book Value Per
Share/Unit............. $ 17.59 $ 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
=========== ========== =========== ========== ========== ==========
Ratio of Earnings to
Fixed Charges.......... $ 50.03x $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ==========
Wtd. Avg. Units
Outstanding............ 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
=========== ========== =========== ========== ========== ==========
Shares Outstanding...... 37,348,464 n/a 37,348,464 n/a n/a n/a
=========== ========== =========== ========== ========== ==========
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 Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund V, Ltd. Adjustments Pro Forma
----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................. 0 $14,523,161 $338,931 5,177 (j) $ 14,867,269
Fees.................... (2,450,663)(b),(c) 1,256,304 0 (13,654)(k) 1,242,650
Interest and Other
Income................. 62,068 (d) 7,687,325 58,654 0 7,745,979
----------- ----------- -------- --------- ------------
Total Revenue.......... $(2,388,595) $23,466,790 $397,585 $ (8,477) $ 23,855,898
Expenses:
General and
Administrative
Expenses............... (377,734)(e) 4,669,012 49,311 (24,087)(l),(m) 4,694,236
Management and Advisory
Fees................... (1,308,560)(f) 0 0 0 (n) 0
Fees Paid to Related
Parties................ (292,786)(g) 23,115 0 0 23,115
Interest Expense........ 0 4,819,998 0 0 4,819,998
State Taxes............. 0 235,208 5,957 4,179 (o) 245,344
Depreciation--Other..... 0 65,819 0 0 65,819
Depreciation--Property.. 0 1,898,278 64,112 27,618 (p) 1,990,008
Amortization............ 541,147(h) 548,515 0 0 548,515
Transaction Costs....... 0 125,926 31,470 0 157,396
----------- ----------- -------- --------- ------------
Total Expenses......... (1,437,933) 12,385,871 150,850 7,710 12,544,431
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties and
Provision for Losses on
Properties ............ $ (950,662) $11,080,919 $246,735 $ (16,187) $ 11,311,467
Equity Earnings of Joint
Ventures/Minority
Interest............... 0 17,271 61,223 (8,290)(q) 70,204
Gain on Sale of
Properties............. 0 0 395,113 0 395,113
Provision For Loss on
Properties............. 0 (215,797) 0 0 (215,797)
----------- ----------- -------- --------- ------------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... (950,662) 10,882,393 703,071 (24,477) 11,560,987
Benefit/(Provision) for
Federal Income Taxes... (248,679)(i) 0 0 0 0
----------- ----------- -------- --------- ------------
Net Earnings (Losses)... $(1,199,341) $10,882,393 $703,071 $ (24,477) $ 11,560,987
=========== =========== ======== ========= ============
Earnings Per
Share/Unit............. $ n/a $ n/a $ 14.60 $ n/a $ 0.26
=========== =========== ======== ========= ============
Book Value Per
Share/Unit............. $ n/a $ n/a $ 328.60 $ n/a $ 16.31
=========== =========== ======== ========= ============
Dividends Per
Share/Unit............. $ n/a $ n/a $ 10 $ n/a $ n/a
=========== =========== ======== ========= ============
Ratio of Earnings to
Fixed Charges.......... $ n/a $ n/a $ n/a $ n/a $ 3.26x
=========== =========== ======== ========= ============
Wtd. Avg. Units
Outstanding............ n/a n/a 50,000 n/a n/a
=========== =========== ======== ========= ============
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,401 n/a 1,012,516 44,509,917 (r)
=========== =========== ======== ========= ============
Shares Outstanding...... 6,150,000 43,498,464 n/a 1,012,516 44,510,980
=========== =========== ======== ========= ============
Calculation of Pro Forma
Distributions:
Pro Forma Cash from
Operations from
Statement of Cash
Flows................. $(23,173,253)
============
Addback Pro Forma
Investments in Notes
Receivable............ 42,571,895
============
Adjusted Pro Forma
Distributions Declared: $ 19,398,642 (s)
============
Pro Forma Wtd. Avg.
Dollars Outstanding.... $890,198,335 (t)
============
Pro Forma Cash
Distributions Declared
per $10,000
Investment............. $ 218 (u)
============
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For The Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 $21,919,865(a) $55,049,526 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $21,919,865 $64,106,902 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 2,889,368(a) 6,931,658 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 2,889,368 12,298,325 11,435,228 7,966,916 25,677,829
Operating
Earnings(Losses) Before
Equity in Earnings of
Joint Ventures/Minority
Interests, Gain on Sale
of Properties, and
Provision for Losses on
Properties............. $32,778,080 $19,030,497 $51,808,577 $17,613,851 $(773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Other Expenses......... 0 0 0 0 0 0
Provision for Loss on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
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
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $19,030,497 $51,182,905 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Units
Outstanding............ n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,559,777 34,207,996 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 34,757 37,372,684 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Calculation of Pro Forma
Distributions Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows.............
Addback Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable......
Addback Pro Forma
Investments in Notes
Receivable............
Adjusted Pro Forma
Distributions Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For The Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund V, Ltd. Adjustments Pro Forma
------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ 0 $55,049,526 $1,500,482 20,708 (j) $ 56,570,716
Fees................... (32,715,768)(b),(c) 3,226,263 0 (28,720)(k) 3,197,543
Interest and Other
Income................ 207,144 (d) 32,221,925 282,795 0 32,504,720
------------- ----------- ---------- --------- ------------
Total Revenue.......... $ (32,508,624) $90,497,714 $1,783,277 $ (8,012) $ 92,272,979
Expenses:
General and
Administrative........ (4,241,719)(e) 15,939,556 228,736 (70,394)(l),(m) 16,097,898
Management and Advisory
Fees.................. (4,658,434)(f) 0 0 0 (n) 0
Fees to Related
Parties............... (2,161,897)(g) 858,787 0 0 858,787
Interest Expense....... 0 21,498,589 0 0 21,498,589
State Taxes............ 0 567,446 9,658 6,299 (o) 583,403
Depreciation--Other.... 0 199,157 0 0 199,157
Depreciation--
Property.............. (340,898)(r) 6,590,760 267,254 110,474 (p) 6,968,488
Amortization........... 2,164,587 (h) 2,328,588 0 0 2,328,588
Transaction Costs...... 0 157,054 14,644 0 171,698
------------- ----------- ---------- --------- ------------
Total Expenses......... (9,238,361) 48,139,937 520,292 46,379 48,706,608
Operating
Earnings(Losses) Before
Equity in Earnings of
Joint Ventures/Minority
Interests, Gain on Sale
of Properties, and
Provision for Losses on
Properties............. $ (23,270,263) $42,357,777 $1,262,985 $ (54,391) $ 43,566,371
Equity in Earnings of
Joint Venture/Minority
Interest.............. 0 (14,138) 240,954 (33,159)(q) 193,657
Gain on Sale of
Properties............ 0 0 444,113 0 444,113
Gain on
Securitization........ 0 3,694,351 0 0 3,694,351
Other Expenses......... 0 0 0 0 0
Provision for Loss on
Properties............ 0 (611,534) (403,157) 0 (1,014,691)
------------- ----------- ---------- --------- ------------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (23,270,263) 45,426,456 1,544,895 (87,550) 46,883,801
Benefit/(Provision) for
Federal Income Taxes.. 6,898,434 (i) 0 0 0 0
------------- ----------- ---------- --------- ------------
Net Earnings (Losses)... $ (16,371,829) $45,426,456 $1,544,895 $ (87,550) $ 46,883,801
============= =========== ========== ========= ============
Earnings Per
Share/Unit............. $ n/a $ n/a $ 30.90 $ n/a $ 1.13
============= =========== ========== ========= ============
Book Value Per
Share/Unit............. $ n/a $ n/a $ 324.54 $ n/a $ 16.36
============= =========== ========== ========= ============
Dividends Per
Share/Unit............. $ n/a $ n/a $ 76.77 $ n/a $ n/a
============= =========== ========== ========= ============
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.13x
============= =========== ========== ========= ============
Wtd. Avg. Units
Outstanding............ n/a n/a 50,000 n/a n/a
============= =========== ========== ========= ============
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,357,996 n/a 1,012,516 41,370,512 (s)
============= =========== ========== ========= ============
Shares Outstanding...... 6,150,000 43,522,684 n/a 1,012,516 44,535,200
============= =========== ========== ========= ============
Calculation of Pro Forma
Distributions Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows............. $ 57,128,188
Addback Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable...... (265,871,668)
Addback Pro Forma
Investments in Notes
Receivable............ 288,590,674
------------
Adjusted Pro Forma
Distributions Declared: $ 79,847,194 (t)
============
Pro Forma Wtd. Avg.
Dollars Outstanding.... $827,410,232 (u)
============
Pro Forma Cash
Distributions Declared
per $10,000
Investment............. $ 965 (v)
============
</TABLE>
F-30
<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 Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 10,490,297 $ 1,989,688 (a) $ 12,479,985 $ (195,278) $(73,545) $ (129,428)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 1,548,813 349,465 (b) 1,898,278 39,581 0 0
Amortization expense... 7,368 0 7,368 0 26,238 424,697
Minority interest in
income of consolidated
joint venture......... 7,763 0 7,763 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 23,234 0 23,234 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 215,797 0 215,797 0 0 (73,166)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (82,660) 0 (82,660) (377,933) (242,251) (6,771)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (449,580)
Investment in notes
receivable............ 0 0 0 0 0 (42,571,895)
Collections on notes
receivable............ 0 0 0 0 0 6,417,907
Increase in restricted
cash.................. 0 0 0 0 0 (402,461)
Decrease in due from
related party......... 0 0 0 0 0 55,382
Decrease (increase) in
prepaid expenses...... 27,548 0 27,548 0 1,811 0
Decrease in net
investment in direct
financing leases...... 787,375 0 787,375 0 0 0
Increase in accrued
rental income......... (1,047,421) 0 (1,047,421) 0 0 0
Decrease (increase) in
intangibles and other
assets................ (30,554) 7,942
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 306,277 0 306,277 (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 0 71,853 25,550 0 0
Decrease in accrued
interest.............. 0 0 0 0 0 (362,877)
Increase in rents paid
in advance............ 0 0 0 0 0 0
and deposits........... 386,365 0 386,365 0 0 0
Increase (decrease) in
deferred rental
income................ 862,647 0 862,647 0 0 0
------------- ------------ ------------- ---------- -------- ------------
Total adjustments...... 3,114,959 349,465 3,464,424 (1,183,414) (344,708) (37,064,802)
------------- ------------ ------------- ---------- -------- ------------
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)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 0 0 0 0
Additions to land and
buildings on operating
leases................ (77,028,830) (58,749,637)(e) (135,778,467) (31,577) (10,092) 0
Investment in direct
financing leases...... (29,608,346) 0 (29,608,346) 0 0 0
Investment in joint
venture............... (117,662) 0 (117,662) 0 0 0
Acquisition of
businesses............
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 134,981
Investment in mortgage
notes receivable...... (1,388,463) 0 (1,388,463) 0 0 0
Collections on mortgage
note receivable....... 75,010 0 75,010 0 0 0
Investment in notes
receivable............ (1,087,483) 0 (1,087,483) 0 0 0
Collection on notes
receivable............ 239,596 0 239,596 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... 0 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------ ------------- ---------- -------- ------------
Net cash provided by
(used in) investing
activities............ (108,916,178) (58,749,637) (167,665,815) (31,577) (10,092) 134,981
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,735 0 210,735 1,288,673 20,572 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,142,237) 0 (1,142,237) 0 0 0
Payment of stock
issuance costs........ (722,001) 0 (722,001) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 36,587,245 33,656,518 (e) 70,243,763 0 0 49,730,934
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (2,385) (10,291,473)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (8,610) 0 (8,610) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0 0
Distributions to
stockholders.......... (14,237,405) 0 (14,237,405) 0 0 0
Other.................. (200,234) 0 (200,234) 0 0 (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
Cash at beginning of
year................... 123,199,837 0 123,199,837 713,308 962,573 2,526,078
------------- ------------ ------------- ---------- -------- ------------
Cash at end of year..... $ 35,796,119 $(22,753,966) $ 13,042,153 $ 591,712 $552,415 $ 4,896,688
============= ============ ============= ========== ======== ============
</TABLE>
F-31
<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>
Combining Historical
Pro Forma Combined CNL Income Proforma Adjusted
Adjustments APF Fund V, Ltd. Adjustments Pro Forma
----------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(1,199,341)(a) $ 10,882,393 $ 703,071 $ (24,477)(a) $ 11,560,987
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 0 1,937,859 64,112 27,618 (b) 2,029,589
Amortization expense... 541,147 (c) 999,450 0 0 999,450
Minority interest in
income of consolidated
joint venture......... 0 7,763 (4,385) 0 3,378
Equity in earnings of
joint ventures, net of
distributions......... 0 23,234 4,784 8,290 (d) 36,308
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 (395,113) 0 (395,113)
Provision for loss on
land, buildings, and
direct financing
leases................ 0 142,631 0 0 142,631
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (709,615) 58,191 0 (651,424)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (449,580) 2,115 0 (447,465)
Investment in notes
receivable............ 0 (42,571,895) 0 0 (42,571,895)
Collections on notes
receivable............ 0 6,417,907 0 0 6,417,907
Increase in restricted
cash.................. 0 (402,461) 0 0 (402,461)
Decrease in due from
related party......... 0 55,382 0 0 55,382
Decrease (increase) in
prepaid expenses...... 0 29,359 (5,754) 0 23,605
Decrease in net
investment in direct
financing leases...... 0 787,375 9,247 0 796,622
Increase in accrued
rental income......... 0 (1,047,421) (15,029) 0 (1,062,450)
Decrease (increase) in
intangibles and other
assets................ 0 (22,612) 0 0 (22,612)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (768,267) 27,010 0 (741,257)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 97,403 40,364 0 137,767
Decrease in accrued
interest.............. 0 (362,877) 0 0 (362,877)
Increase in rents paid
in advance............ 0 0 0 0 0
and deposits........... 0 386,365 31,663 0 418,028
Increase (decrease) in
deferred rental
income................ 0 862,647 0 0 862,647
----------- ------------- ---------- ----------- -------------
Total adjustments...... 541,147 (34,587,353) (182,795) 35,908 (34,734,240)
----------- ------------- ---------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (658,194) (23,704,960) 520,276 11,431 (23,173,253)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 1,113,759 0 1,113,759
Additions to land and
buildings on operating
leases................ (135,820,136) 0 0 (135,820,136)
Investment in direct
financing leases...... 0 (29,608,346) 0 0 (29,608,346)
Investment in point
venture............... 0 (117,662) 00 0 (117,662)
Acquisition of
businesses............ (9,174,619)(f) (9,174,619) (1,528,381)(g) (10,943,000)
(240,000)(g)
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 134,981 0 0 134,981
Investment in mortgage
notes receivable...... 0 (1,388,463) 0 0 (1,388,463)
Collections on mortgage
note receivable....... 0 75,010 277,819 0 352,829
Investment in notes
receivable............ 0 (1,087,483) 0 0 (1,087,483)
Collection on notes
receivable............ 0 239,596 0 0 239,596
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 0 0 0
----------- ------------- ---------- ----------- -------------
Net cash provided by
(used in) investing
activities............ (9,174,619) (176,747,122) 1,391,578 (1,768,381) (177,123,925)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 1,519,980 0 0 1,519,980
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,142,237) 0 0 (1,142,237)
Payment of stock
issuance costs........ 0 (722,001) 0 0 (722,001)
Proceeds from borrowing
on line of
credit/notes payable.. 0 119,974,697 0 0 119,974,697
Payment on line of
credit/notes payable.. 0 (22,874,147) 0 0 (22,874,147)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (8,610) 0 0 (8,610)
Distributions to
limited partners...... 0 0 (500,000) 0 (500,000)
Distributions to
stockholders.......... 0 (14,237,405) 0 0 (14,237,405)
Other.................. 0 (209,836) 0 0 (209,836)
----------- ------------- ---------- ----------- -------------
Net cash provided by
(used in) financing
activities............ 0 82,300,441 (500,000) 0 81,800,441
Net increase in cash.... (9,832,813) (118,151,641) 1,411,854 (1,756,950) (118,496,737)
Cash at beginning of
year................... 0 127,401,796 352,648 0 127,754,444
----------- ------------- ---------- ----------- -------------
Cash at end of year..... $(9,832,813) $ 9,250,155 $1,764,502 $(1,756,950) $ 9,257,707
=========== ============= ========== =========== =============
</TABLE>
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Property CNL Historical
Acquisition Financial CNL
Historical Pro Forma Historical Services, Financial
APF Adjustments Subtotal Advisor Inc. Corp.
------------ ------------ ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 32,152,408 $ 19,030,497 (a) $ 51,182,905 $10,656,379 $(468,133) $ 427,134
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 4,042,290 2,889,368 (b) 6,931,658 119,923 79,234 0
Amortization expense... 11,808 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
leases................ 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) (2,187,652) 0 0 0
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 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 693,372 0 0 0
------------ ------------ ------------ ----------- --------- ------------
Total adjustments...... 6,963,867 2,889,368 9,853,235 (3,608,563) 316,963 1,610,591
------------ ------------ ------------ ----------- --------- ------------
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
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (58,749,637)(e) (258,851,304) (381,671) (236,372) 0
Investment in direct
financing leases...... (47,115,435) (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) (974,696) 0 0 0
Acquisition of
businesses............
Purchase of other
investments........... (16,083,055) (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) (6,281,069) 0 0 0
0 0 0 0 0
Other.................. 0 0 200,000 0 0
------------ ------------ ------------ ----------- --------- ------------
Net cash provided by
(used in) investing
activities............ (277,338,756) (58,749,637) (336,088,393) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0
0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 33,656,518 (e) 41,348,558 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) (34,073) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0
Distributions to
stockholders.......... (39,449,149) (39,449,149) (9,364,488) 0 0
Other.................. (95,101) (95,101) 0 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
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
============ ============ ============ =========== ========= ============
</TABLE>
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund V, Ltd. Adjustments Pro Forma
----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... (16,371,829)(a) $ 45,426,456 $1,544,895 $ (87,550)(a) $ 46,883,801
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... (340,898)(b) 6,789,917 267,254 110,474 (b) 7,167,645
Amortization expense... 2,164,587 (c) 4,478,671 0 4,478,671
Minority interest in
income of consolidated
joint venture......... 30,156 (67,013) (36,857)
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 41,898 33,159 (d) 59,617
Loss (gain) on sale of
land, building, net
investment in direct
leases................ 0 (444,113) (444,113)
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 1,009,576 403,157 1,412,733
Gain on
securitization........ (3,356,538) 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 265,871,668 0 265,871,668
Decrease (increase) in
other receivables..... (2,543,413) 23,215 (2,520,198)
Increase in accrued
interest income
included in notes
receivable............ (170,492) 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 (6,533) (6,533)
Investment in notes
receivable............ (288,590,674) 0 (288,590,674)
Collections on notes
receivable............ 23,539,641 0 23,539,641
Decrease in restricted
cash.................. 2,504,091 0 2,504,091
Decrease (increase) in
due from related
party................. (953,688) 0 (953,688)
Increase in prepaid
expenses.............. 7,246 7,435 14,681
Decrease in net
investment in direct
financing leases...... 1,971,634 38,017 2,009,651
Increase in accrued
rental income......... (2,187,652) (70,237) (2,257,889)
Increase in intangibles
and other assets...... (154,351) 0 (154,351)
Increase (decrease) in
accounts payable,
accrued expenses and
other
liabilities........... 846,680 (100,554) 746,126
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. (133,364) 19,181 (114,183)
Increase in accrued
interest.............. (77,968) 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 (6,867) 429,976
Decrease in deferred
rental income......... 693,372 0 693,372
----------- ------------ ---------- ----------- ------------
Total adjustments...... 1,823,689 9,995,915 104,840 143,633 10,244,388
----------- ------------ ---------- ----------- ------------
Net cash provided by
(used in) operating
activities............ (14,548,140) 55,422,371 1,649,735 56,083 57,128,189
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 2,125,220 4,511,161
Additions to land and
buildings on operating
leases................ (259,469,347) (125,000) (259,594,347)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435)
Investment in joint
venture............... (974,696) (765,201) (1,739,897)
Acquisition of
businesses............ (9,174,619)(f) (9,174,619) 0 (1,528,381)(g) (10,943,000)
0 (240,000)(g)
Purchase of other
investments........... (16,083,055) 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 295,514 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 212,821 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648)
Collections on mortgage
note receivable....... 291,990 19,931 311,921
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750)
Collections on
equipment notes
receivable............ 3,046,873 0 3,046,873
Decrease in restricted
cash.................. 0 0 0
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069)
0 0 0
Other.................. 200,000 0 200,000
----------- ------------ ---------- ----------- ------------
Net cash provided by
(used in) investing
activities............ (9,174,619) (343,389,380) 1,254,950 (1,768,381) (343,902,911)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 386,592,011 0 386,592,011
Contributions from
limited partners...... 0 0 0
0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925)
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 455,102,478 0 455,102,478
Payment on line of
credit/notes payable.. (411,813,826) 0 (411,813,826)
Retirement of shares of
common stock.......... (639,528) 0 (639,528)
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073)
Distributions to
limited partners...... 0 (3,913,327) (3,913,327)
Distributions to
stockholders.......... (48,813,637) 0 (48,813,637)
Other.................. (2,595,088) 0 (2,595,088)
----------- ------------ ---------- ----------- ------------
Net cash provided by
(used in) financing
activities............ 0 338,643,762 (3,913,327) 0 334,730,435
Net increase (decrease)
in cash............... (23,722,759) 50,676,653 (1,008,642) (1,712,298) 47,955,713
Cash at beginning of
year.................. 49,829,130 1,361,290 51,190,420
----------- ------------ ---------- ----------- ------------
Cash at end of year.... (23,722,759) 100,505,783 $ 352,648 $(1,712,298) $ 99,146,133
=========== ============ ========== =========== ============
</TABLE>
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of 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 Income Fund. This unaudited pro forma financial
information has been prepared utilizing the historical financial statements of
APF and the historical combined financial information of the Advisor, CNL
Restaurant Financial Services Group and the Income Fund and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, the Advisor the CNL Restaurant Financial Services Group and the Income
Fund. The Pro Forma Balance Sheet was prepared as if the transactions described
above occurred on 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 Fund 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 Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
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-35
<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 Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Shares Offered.......... 3,800,000 2,350,000 1,012,515.75 7,162,515.75
Exchange Value.......... $ 20 $ 20 $ 20 $ 20
----------- ----------- ------------ ------------
Share Consideration..... $76,000,000 $47,000,000 $ 20,250,315 $143,250,315
Cash Consideration...... -- -- 240,000 240,000
APF Transaction Costs... 5,668,870 3,505,749 1,528,381 10,703,000
----------- ----------- ------------ ------------
Total Purchase
Price.............. $81,668,870 $50,505,749 $ 22,018,696 $154,193,315
=========== =========== ============ ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 7,141,252 $10,006,878 $ 16,430,173 $ 33,578,303
Purchase Price
Adjustments:
Land and buildings on
operating leases..... 4,124,010 4,124,010
Net investment in
direct financing
leases............... 1,052,232 1,052,232
Investment in joint
ventures............. 729,245 729,245
Accrued rental
income............... (254,992) (254,992)
Intangibles and other
assets............... (2,792,876) (61,972) (2,854,848)
Goodwill*............. 43,291,747 -- 43,291,747
Excess purchase
price................ 74,527,618 -- -- 74,527,618
----------- ----------- ------------ ------------
Total Allocation.... $81,668,870 $50,505,749 $ 22,018,696 $154,193,315
=========== =========== ============ ============
</TABLE>
--------
* Goodwill represents the portion of the purchase price which is
assumed to relate to the ongoing value of the debt business.
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $10,703,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of
the Advisor, CNL Financial Services Group and the Income Fund. The
excess purchase price paid for the Advisor to a related party of
$74,527,618 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 43,291,747
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.... 74,527,618
Goodwill for
CFC
(Intangibles
and other
assets)..... 43,291,747
CFC/CFS Org
Costs/Other
Assets..... 2,792,876
Cash to pay
APF
transaction
costs...... 9,174,619
APF Common
Stock...... 61,500
APF APIC.... 122,938,500
(To record
acquisition
of CFA, CFS
and CFC)
</TABLE>
<TABLE>
<S> <C> <C>
2.Partners Capital................................... 16,430,173
Land and buildings on operating leases............. 4,124,010
Net investment in direct financing leases.......... 1,052,232
Investment in joint ventures....................... 729,245
Accrued rental income............................. 254,992
Intangibles and other assets...................... 61,972
Cash to pay APF Transaction costs................. 1,528,381
Cash consideration to Income Fund................. 240,000
APF Common Stock.................................. 10,125
APF APIC.......................................... 20,240,190
(To record acquisition of Income Fund)
</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 Income Fund of $268,812 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, 1999.
(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.
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................... $ (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 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
</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>
(g) Represents the elimination of $292,786 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from
agreements between these entities.
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4)
<TABLE>
<S> <C>
Amortization of goodwill....................................... $541,147
</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 $5,177 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................... $ 0
Reimbursement of administrative costs......................... (13,654)
--------
$(13,654)
========
</TABLE>
(l) Represents the elimination of $13,654 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $10,433 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $4,179 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through May 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 Fund 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 $27,618 as a
result of adjusting the historical basis of the real estate wholly
owned by the Income Fund to fair value as a result of accounting
for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings is
being depreciated using the straight-line method over the remaining
useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $8,290 as a result of adjusting the historical basis of the real
estate owned by the Income Fund, indirectly through joint venture
or tenancy in common arrangements, to fair value as a result of
accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 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.
(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
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates.......................... $ (1,773,406)
Secured equipment lease fees.............................. (54,998)
Advisory fees............................................. (305,030)
Reimbursement of administrative costs..................... (408,762)
Acquisition fees.......................................... (21,794,386)
Underwriting fees......................................... (388,491)
Administrative, executive and guarantee fees.............. (1,233,043)
Servicing fees............................................ (1,570,331)
Development fees.......................................... (229,153)
Management fees........................................... (1,851,004)
------------
Total................................................... $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
F-40
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the year ended
December 31, 1998, which were deferred for pro forma purposes as
described in 5(II)(c). These deferred loan origination fees are
being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs........................... $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,851,004)
Administrative executive and guarantee fees................ (1,233,043)
Servicing fees............................................. (1,269,357)
Advisory fees.............................................. (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(g) Represents the elimination of $2,161,897 in fees between the
Advisor and the CNL Restaurant Financial Services Group resulting
from agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4)
<TABLE>
<S> <C>
Amortization of goodwill..................................... $2,164,587
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $20,708 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees................................................ $ 0
Reimbursement of administrative costs.......................... (28,720)
--------
$(28,720)
========
</TABLE>
(l) Represents the elimination of $28,720 in administrative costs
reimbursed by the Income Fund to the Advisor.
F-41
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(m) Represents savings of $41,674 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $6,299 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1998 through 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 Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
(p) Represents an increase in depreciation expense of $110,474 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Income Fund through joint venture or tenancy in
common arrangements with affiliates or unrelated third parties, to
fair value as a result by the Income Fund to fair value as a result
of accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $33,159 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF
and the Advisor which on a historical basis were capitalized as
part of the basis of the building.
(s) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a reverse stock split proposal and a
proposal to increase the number of authorized common shares of APF
on January 1, 1998.
(t) 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 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.
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CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Concluded)
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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non-Cash Investing Activities:
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B)
(II)The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the use of amounts borrowed under APF's credit facility
and the use of cash to 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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
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<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund V, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund V, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
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(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
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Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
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Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among by and among CNL American Properties Fund,
Inc., a Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware
limited partnership (the "Operating Partnership"), CNL APF GP corp., a
Delaware corporation (the "OP General Partner"), CNL Income Fund V, Ltd., a
Florida limited partnership (the "Fund"), and Robert A. Bourne, James M.
Seneff, Jr., and CNL Realty Corporation, a Florida corporation (together with
Messrs. Borne and Seneff, the "General Partners"). APF, the Operating
Partnership, the OP General Partner, the Fund and the General Partners are
referred to collectively herein as the "Parties" and individually as a
"Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund
will be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. Amendments to Merger Agreement
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its
entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred
by the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote
against the Merger and affirmatively elect the note option, such limited
partners shall be entitled to receive, in lieu of the Share
Consideration, notes (the "Notes") in the aggregate amount equal to 97%
of the value (based on the Exchange Value as defined in the Registration
Statement) of the Share Consideration such Dissenting Partners would
have otherwise received had such partners not elected to receive the
Notes (the "Note Option"). The Notes will mature on the fifth
anniversary of the Closing Date and will bear interest at a fixed rate
equal to seven percent. The aggregate Share Consideration shall be
reduced on a one-for-basis for all APF Shares otherwise distributable to
Dissenting Partners had such Dissenting Partners not elected the Note
Option."
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1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to
Dissenting Limited Partners shall not have exceeded 15% of the value of
the Share Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. General
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will
constitute one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of
Florida or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Florida.
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IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.________
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne____________
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne____________
By: Robert A. Bourne
Its: President
CNL INCOME FUND V, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.________
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.________
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne____________
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.________
James M. Seneff, Jr., as General
Partner
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund V, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
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"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 2,049,031 fully paid and nonassessable APF Common
Shares (1,024,516 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $18,799,647, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 58,950,969 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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<PAGE>
APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 50,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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<PAGE>
Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $2,049,031 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $204,903 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
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 V, 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
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<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND VI, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund VI, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly-owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999, and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 8 limited partnerships, which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties on a triple-net
basis, APF has the ability to offer a complete range of restaurant property
services to operators of national and regional restaurant chains, from triple-
net leasing and mortgage financing to site selection, construction management
and build-to-suit development. If APF acquires all of the Income Funds in the
Acquisition, APF expects to have total assets of approximately $1.5 billion at
the time of the consummation of the Acquisition and will be one of the largest
triple-net lease REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 1,865,194 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is uncertain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for
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trading on the NYSE. We do not know the value at which an APF Share will trade
on the NYSE upon listing. It is possible that the APF Shares will trade at
prices substantially below the exchange value. APF has, however, recently sold
$750 million of APF Shares through three public offerings. In each offering,
the offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At March 31, 1999, APF has invested all of the net offering proceeds to acquire
restaurant properties, to make mortgage loans and to pay fees and other
expenses.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the Acquisition?
There are a number of material risks and considerations that you should
consider, including:
. We are uncertain as to the value at which APF Shares will trade following
listing.
. We have material conflicts in light of our being both general partners of
the Income Funds and members of APF's Board of Directors.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. As stated below, the Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's limited partners will be binding on you even if you vote against the
Acquisition.
Did you receive a fairness opinion in connection with APF's acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
with respect to the fairness, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the colored
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's acquisition of your
Income Fund. If you prefer, you may instead vote by telephone, following the
instructions on your consent form. If you sign and send in your consent form
and do not indicate how you want to vote, your consent form will be counted as
a vote "For" the Acquisition. If you do not vote or you abstain from voting, it
will count as a vote "Against" the Acquisition.
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In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2004 in an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only receive the notes if you vote "Against" the
Acquisition, and you elect to receive notes on your consent form. You will
receive APF Shares if your Income Fund elects to be acquired in the Acquisition
and you vote "For" the Acquisition, or you vote "Against" the Acquisition and
do not affirmatively select the notes option on your consent form. In addition,
if Limited Partners in your Income Fund elect to receive notes in an amount
greater than 15% of the estimated value of APF Shares, based on the exchange
value, to be paid to your Income Fund, then APF has the right to decline to
acquire your Income Fund. The notes will not be listed on any exchange or
automated quotation system, and a market for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
person subject to income taxation or a tax-paying entity and you receive APF
Shares, the tax that you must pay will generally be based on the difference
between the value of the APF Shares you receive and the tax basis of your
units. If you elect to receive notes, your tax will be based upon your
allocable share of the gain which will be recognized by your Income Fund; your
Income Fund's gain will generally equal the excess, if any, of the value of the
APF Shares received by your Income Fund over the tax basis of your Income
Fund's net assets. Some of the gain may be subject to the 25% rate of tax
applicable to certain types of real property gain.
We urge you to consult with your tax advisor to evaluate the taxes that will be
incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $1,566. To
review the tax consequences to the Limited Partners of the Income Funds in
greater detail, see pages 180 through 194 of the consent solicitation and
"Federal Income Tax Considerations" in this supplement.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds acquired by
APF may be differently constructed, located in a different geographic area or
of a different restaurant chain than the restaurant properties owned by your
Income Fund. Because the market for real estate may vary from one region of the
country to another, the change in geographic diversity may expose you to
different and greater risks than those to which you are presently exposed. For
geographic information regarding APF's and the Income Funds' restaurant
properties, see "APF's Business and The Restaurant Properties--Business
Objectives and Strategies" and "--The Restaurant Properties--General" and
"Business of the Income Funds--Description of Restaurant Properties" in the
consent solicitation.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund. This description is qualified in its entirety
by the more detailed discussion in the section entitled "Risk Factors"
contained in the consent solicitation.
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Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease below the exchange value upon listing.
Your Income Fund will be receiving 1,865,194 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices substantially below
the exchange value or the historical per share book value of the assets of APF.
The APF Shares have been approved for listing on the NYSE, subject to official
notice of issuance. Prior to listing, the existing APF stockholders have not
had an active trading market in which they could sell their APF Shares.
Additionally, any Limited Partners of the Income Funds who become APF
stockholders as a result of the Acquisition, will have transformed their
investment in non-tradable units into an investment in freely tradable APF
Shares. Consequently, some of these stockholders may choose to sell their APF
Shares upon listing at a time when demand for APF Shares may be relatively low.
The market price of the APF Shares may be volatile after the Acquisition, and
the APF Shares could trade at prices substantially less than the exchange value
as a result of increased selling activity following the issuance of the APF
Shares, the interest level of investors in purchasing the APF Shares after the
Acquisition and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund made $920, $900 and $920, respectively, in distributions per $10,000
investment to you. While historically, APF has made distributions equal to
7.625% per APF Share, based on the exchange value, we cannot be sure that APF
will be able to maintain this level of distributions in the future. In the
event that APF is unable to maintain this level of distributions in the future,
your distributions per $10,000 investment may decrease substantially after the
Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have two conflicts of interest in the Acquisition of
your Income Fund. First, we, James M. Seneff, Jr. and Robert A. Bourne, who
also sit on the Board of Directors of APF, and CNL Realty Corp., an entity
whose sole stockholders are Messrs. Seneff and Bourne, are the three general
partners of the Income Funds. As Board members of APF, Messrs. Seneff and
Bourne have a different interest in the completion of the Acquisition which may
conflict with your interest as a Limited Partner of the Income Fund or with
their own positions as the general partners of your Income Fund. Second,
assuming only your Income Fund is acquired in the Acquisition, we will receive
19,087 APF Shares. Finally, in the event that your Income Fund is not acquired,
however, we, as the general partners of your Income Fund, may be required to
pay all or a substantial portion of the Acquisition costs allocated to your
Income Fund to the extent that you or other Limited Partners of your Income
Fund vote against the Acquisition. For additional information regarding the
Acquisition costs allocated to your Income Fund, see "Comparison of Alternative
Effect on Financial Condition and Results of Operations" contained in this
supplement.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own and lease on a triple-net basis, on the date that the Acquisition
is consummated, assuming only your Income Fund was acquired as of March 31,
1999,
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555 restaurant properties. The risks inherent in investing in an operating
company such as APF include that APF may invest in new restaurant properties
that are not as profitable as APF anticipated, may incur substantial
indebtedness to make future acquisitions of restaurant properties which it may
be unable to repay and may make mortgage loans to prospective operators of
national and regional restaurant chains which may not have the ability to
repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through sale of your APF Shares, not from
liquidation proceeds, if any, from restaurant properties. Continuation of your
Income Fund would, on the other hand, permit you eventually to receive
liquidation proceeds, if any, from the sale of the Income Fund's restaurant
properties, and your share of these sale proceeds could be higher than the
amount realized from the sale of your APF Shares or from the combination of
cash paid to and payments on any notes if you elect to receive the notes.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to certain risks inherent in the business of lending,
such as the risk of default 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. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would typically retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from
S-5
<PAGE>
APF's estimates. For example, APF's gain upon the sale of loans will have been
either overstated or understated if prepayments and/or defaults are greater
than or less than anticipated. In addition, higher levels of future
prepayments, and/or increases in delinquencies or liquidations, would result in
a lower valuation of the mortgage-related securities. These adjustments would
adversely affect APF's earnings in the period in which the adjustment is made.
Such adjustments may be material if APF's estimates are significantly different
from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to Fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
March 31, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.62x and its ratio of debt-to-total assets was
28.02%. If only your Income Fund were acquired as of that date, APF's debt
service ratio would have been 3.77x and its ratio of debt-to-total assets would
have been 27.04%. Up through the time immediately prior to the consummation of
the Acquisition, as a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former limited partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgages. APF
typically does not require that a third party guarantee the obligations of the
tenant or the borrower. The ability of the tenants or borrowers to pay their
obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to: (1)
national, regional and local economic conditions which may be adversely
affected by industry slowdowns, employer relocations, prevailing
S-6
<PAGE>
employment conditions and other factors, and which may reduce consumer demand
for the products offered by APF's customers; (2) local real estate conditions;
(3) changes or weaknesses in specific industry segments; (4) perceptions by
prospective customers of the safety, convenience, services and attractiveness
of the restaurant chain; (5) changes in demographics, consumer tastes and
traffic patterns; (6) the ability to obtain and retain capable management; (7)
changes in laws, building codes, similar ordinances and other legal
requirements, including laws increasing the potential liability for
environmental conditions existing on properties; (8) the inability of a
particular restaurant chain's computer system, or that of its franchisor or
vendors, to adequately address Year 2000 issues; (9) increases in operating
expenses; and (10) increases in minimum wages, taxes including income, service,
real estate and other taxes or mandatory employee benefits.
APF has tenants of two significant restaurant chains that have filed for
bankruptcy protection.
The fact that APF has tenants of two significant restaurant chains that have
filed for bankruptcy protection may adversely affect APF's total rental, earned
and interest income. Because all of APF's properties are leased on a triple-net
basis, if a tenant has defaulted on its lease obligations or has declared
bankruptcy, it would reduce APF's rental, earned and interest income until APF
could lease those affected properties to a new tenant or tenants. As of March
31, 1999, your Income Fund had no tenants under bankruptcy protection, and
therefore, assuming that your Income Fund is acquired by APF, you, as an APF
stockholder or noteholder, may be subject to the adverse consequences
associated with having tenants under bankruptcy protection.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as a stockholder, would be reduced substantially for
each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to certain adjustments that are unique to REITs, a REIT generally
must distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
For a more detailed discussion of the risks associated with the Acquisition,
see "Risk Factors" in the consent solicitation.
S-7
<PAGE>
CONSIDERATION PAID TO INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth information regarding the estimated value of
the consideration that your Income Fund will receive in the Acquisition. The
APF Shares payable to your Income Fund will not change if APF acquires fewer
than all of the Income Funds in the Acquisition. This data assumes that none of
the Limited Partners of your Income Fund have elected to receive the notes. You
should note that the APF Shares may trade at prices substantially below the
exchange value upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited
Partner
Original Investments
Limited Less any
Partner Distributions Number of Estimated Value
Investments of Net Sales APF Estimated of APF Shares
Less any Proceeds per Shares Value of Estimated Value per Average
Distributions $10,000 Offered to APF Shares Estimated of APF Shares $10,000 Original
of Net Sales Original Income Payable to Acquisition after Acquisition Limited Partner
Proceeds(1) Investment(1) Fund Income Fund Expenses Expenses Investment
- ------------- ------------- ---------- ----------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$35,000,000 $10,000 $1,865,194 $37,303,880 $421,000 $36,882,880 $10,429
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2004. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2004. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest. For more detailed information, see "The Acquisition" and
"Description of the Notes" in the consent solicitation.
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
S-8
<PAGE>
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1)................................................... $ 21,111
Appraisals and Valuation(2)..................................... 6,435
Fairness Opinions(3)............................................ 30,000
Solicitation Fees(4)............................................ 16,346
Printing and Mailing(5)......................................... 106,781
Accounting and Other Fees(6).................................... 44,133
--------
Subtotal.................................................... $224,806
========
</TABLE>
Closing Transaction Costs
<TABLE>
<S> <C>
Title, Transfer Tax and Recording Fees(7)....................... $ 89,999
Legal Closing Fees(8)........................................... 44,455
Partnership Liquidation Costs(9)................................ 61,740
--------
Subtotal.................................................... 196,194
--------
Total........................................................... $421,000
========
</TABLE>
--------
(1) Aggregate legal fees to be incurred by all of the Income
Funds in connection with the Acquisition is estimated to
be $312,063. Your Income Fund's pro-rata portion of these
fees was determined based on the percentage of the value
of the APF Share consideration payable to your Income
Fund, based on the exchange value, to the total value of
the APF Share consideration payable to all of the Income
Funds, based on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by
all of the Income Funds in connection with the Acquisition
were $105,420. Your Income Fund's pro-rata portion of
these fees was determined based on number of restaurant
properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg
Mason and incurred a fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to
be $249,626. Your Income Fund's pro-rata portion of these
fees was determined based on the number of Limited
Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the
Income Funds in connection with the Acquisition is
estimated to be $1,610,399. Your Income Fund's pro-rata
portion of these fees was determined based on the number
of Limited Partners in your Income Fund.
(6) Aggregate accounting and other fees to be incurred by the
Income Funds in connection with the Acquisition is
estimated to be $683,904. Your Income Fund's pro-rata
portion of these fees was determined based on the
percentage of your Income Fund's total assets as of March
31, 1999 to the total assets of all of the Income Funds as
of March 31, 1999.
(7) Aggregate title, transfer tax and recording fees to be
incurred by all of the Income Funds in connection with the
Acquisition is estimated to be $1,312,808. Your Income
Fund's pro-rata portion of these fees was determined based
on the percentage of the value of the APF Share
consideration payable to your Income Fund, based on the
exchange value, to the total value of the APF Share
consideration payable to all of the Income Funds, based on
the exchange value.
(8) Aggregate legal closing fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to
be $648,454. Your Income Fund's pro-rata portion of these
fees was determined based on the percentage of your Income
Fund's total assets as of March 31, 1999 to the total
assets of all of the Income Funds as of March 31, 1999.
(9) Aggregate partnership liquidation costs to be incurred by
all of the Income Funds in connection with the Acquisition
is estimated to be $895,326. Your Income Fund's pro-rata
portion of these costs was determined based on the
percentage of the value of the APF Share consideration
payable to your Income Fund, based on the exchange value,
to the total value of the APF Share consideration payable
to all of the Income Funds, based on the exchange value.
S-9
<PAGE>
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 80% or more in value of your Income Fund's
restaurant properties acquired within two years of the initial date of the
prospectus (June 1989). Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding units.
Consequence of Failure to Approve the Acquisition
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition, the Acquisition may
not be consummated under the terms of the partnership agreement. In such event,
we plan to continue to operate your Income Fund as a going concern and to
eventually dispose of your Income Fund's restaurant properties approximately 7
to 12 years after they were acquired or as soon thereafter if, in our opinion,
market conditions permit, as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at
. We and members of APF's management
intend to solicit actively your support for the Acquisition and would like to
use the special meeting to answer questions about the Acquisition and the
solicitation materials and to explain in person our reasons for recommending
that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain their votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
S-10
<PAGE>
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning on attending the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about
, 1999 and will continue until the later of (a) , 1999, a
date not less than 60 calendar days from the initial delivery of the
solicitation materials, or (b) such later date as we may select and as to which
we give you notice. At our discretion, we may elect to extend the solicitation
period. Under no circumstances will the solicitation period be extended beyond
March 31, 2000. Any consent form received by Corporate Election Services prior
to 5:00 p.m., Eastern time, on the last day of the solicitation period will be
effective provided that such consent form has been properly completed and
signed. If you fail to return a signed consent form by the end of the
solicitation period, your units will be counted as voting "Against" the
Acquisition of your Income Fund and you will receive APF Shares if your Income
Fund is acquired. If you prefer, you may instead vote by telephone according to
the instructions on your consent form.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
S-11
<PAGE>
During the years ended December 31, 1996, 1997 and 1998 and the quarter
ended March 31, 1999, the aggregate amounts accrued or paid by your Income Fund
to us are shown below under "Historical Distributions Paid to the General
Partners and Affiliates" and the estimated amounts of compensation that would
have been paid had the Acquisition been in effect for the periods presented,
are shown below under "Pro Forma Distributions to Be Paid to the General
Partners Following the Acquisition":
<TABLE>
<CAPTION>
Quarter
Ended
Year Ended December 31, March
------------------------ 31,
1996 1997 1998 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the General
Partners and Affiliates:
General Partner Distributions.............. -- -- -- --
Accounting and Administrative Services..... $95,420 $87,877 $107,969 $25,028
Broker/Dealer Commissions.................. -- -- -- --
Due Diligence and Marketing Support Fees... -- -- -- --
Acquisition Fees........................... -- -- -- --
Asset Management Fees...................... -- -- -- --
Real Estate Disposition Fees(1)............
------- ------- -------- -------
Total historical......................... $95,420 $87,877 $107,969 $25,028
Pro Forma Distributions to Be Paid to the
General Partners Following the Acquisition:
Cash Distributions on APF Shares........... $40,555 $21,663 $ 36,841 $ 8,353
Salary Compensation........................ -- -- -- --
------- ------- -------- -------
Total pro forma.......................... $40,555 $21,663 $ 36,841 $ 8,353
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to certain minimum
returns to the Limited Partners. To date, no such fees have been paid since
the required minimum returns have not been made to the Limited Partners.
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
contained herein under the caption "Financial Statements" and in the consent
solicitation under the caption "Summary--Our Reasons for Supporting the
Acquisition--Prices for Income Fund Units."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
Quarter Ended
March 31, 1999
----------------
Pro
1994 1995 1996 1997 1998 Historical Forma
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income............ $876 $809 $793 $821 $885 $186 $132
Distributions from Return of
Capital(1).......................... 24 91 127 79 35 39 96
---- ---- ---- ---- ---- ---- ----
Total............................ $900 $900 $920 $900 $920 $225 $228
==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from certain non-cash
items. This amount is not required to be presented as a return of capital
except for purposes of this table, and the Income Fund has not treated this
amount as a return of capital for any other purpose.
S-12
<PAGE>
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses during 1999. Thus, the pro forma information regarding
the distributions to APF stockholders for the quarter ended March 31, 1999 is
not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the Acquisition
with those of several alternatives, the Acquisition is more economically
attractive to you and the other Limited Partners than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to certain closing conditions. Second, if your Income Fund is acquired
all Limited Partners of your Income Fund who vote against the Acquisition will
be given the option of receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others, that we will be relieved,
from certain ongoing liabilities with respect to the Income Fund if it is
acquired by APF. For a further discussion of the conflicts of interest and
potential benefits of the Acquisition to us, see "Conflicts of Interest" below.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the values of the
consideration which would have been received by you and the other Limited
Partners in alternative transactions and concluded that the Acquisition is fair
based on such comparison. In addition, we believe the Acquisition is the best
way to maximize the return on your investment because of your ability to
participate in the potential appreciation of APF Shares. Since the
S-13
<PAGE>
investment in your Income Fund is an investment in a static portfolio due
restrictions contained in your Income Fund's partnership agreement and limited
capital resources, your investments have little or no opportunity to
appreciate. Because APF is a growth-oriented company, you, as an APF
stockholder, will have the opportunity to participate in APF's future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinions of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinions of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., an affiliate of CNL Group, Inc., and (3) Valuation
Associates has previously performed valuation appraisals for APF. See "Reports,
Opinions and Appraisals" in the consent solicitation.
On rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Funds, Legg
Mason did not address or render any opinion with respect to, any other aspect
of the Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition or
the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Legg Mason's opinion also does not compare the relative merits of the
Acquisition with those of any other transaction or business strategy which were
or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares will exceed the going concern value and
liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will
S-14
<PAGE>
vary, however, from Income Fund to Income Fund. In addition to the receipt of
cash available for distribution, you and the other Limited Partners will be
able to benefit from the potential growth of APF as an operating company and
will also receive investment liquidity through the public market in APF Shares.
5. Net Book Value of the Income Fund. We calculated the book value of your
Income Fund under generally accepted accounting principles, or GAAP, as of
March 31, 1999 per average $10,000 original investment. Since the calculation
of the book value was done on a GAAP basis, it is primarily based on historical
cost and, therefore, it is not indicative of the true fair market value of your
Income Fund. This figure was compared to three other figures:
(1) the value of the Income Fund if it commenced an orderly liquidation of
its investment portfolio on December 31, 1998,
(2) the value of the Income Fund if it continued to operate in accordance
with its existing partnership agreement and business plans, and
(3) the estimated value of the APF Shares, based on the exchange value, paid
to each Income Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated
Original Values of APF
Limited Partner Shares per
Investments Less Going Average Original
any Distributions GAAP Book Liquidation Concern Limited Partner
of Sales Proceeds(1) Value Value(2) Value(2) Investment
-------------------- --------- ----------- -------- ----------------
<S> <C> <C> <C> <C> <C>
CNL Income Fund VI,
Ltd.................... $10,000 $8,133 $9,726 $10,385 $10,429
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
(2) Liquidation and going concern values were based on appraisals prepared by
Valuation Associates. For a complete description of the methodologies
employed by Valuation Associates, see "Reports, Opinions and Appraisals" in
the consent solicitation.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have contractual
obligations pursuant to your Income Fund's partnership agreement as well as
state law, to assess whether the terms of the Acquisition are fair and
equitable to the Limited Partners of your Income Fund without regard to whether
the Acquisition is fair and equitable to any of the other participants
including the Limited Partners in other Income Funds. James M. Seneff, Jr. and
Robert A. Bourne act as the individual general partners of all of the Income
Funds and also as members of the Board of Directors of APF. While Messrs.
Seneff and Bourne have sought faithfully to discharge their obligations to your
Income Fund, there is an inherent conflict of interest in serving, directly or
indirectly, in a similar capacity with respect to your Income Fund and also on
APF's Board of Directors.
Lack of Independent Representation
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and
S-15
<PAGE>
conditions of the Acquisition or to determine what procedures should be used to
protect the rights and interests of the Limited Partners. In addition, no
investment banker, attorney, financial consultant or expert was engaged to
represent the interests of the Limited Partners. We have been the parties
responsible for structuring all the terms and conditions of the Acquisition.
Legal counsel engaged to assist with the preparation of the documentation for
the Acquisition, including this consent solicitation, was engaged by us and did
not serve, or purport to serve, as legal counsel for the Income Funds or
Limited Partners. If an independent representative had been retained for the
Income Funds, the terms of the Acquisition may have been different and possibly
more favorable to the Limited Partners. In particular, had separate
representation for each of the Income Funds been arranged by us, issues unique
to the value of each of the specific Income Funds might have been highlighted
or received greater attention, resulting in adjustments to the value assigned
to the assets of such Income Funds and increasing the number of APF Shares or
notes that would be allocable to such Income Fund if acquired in the
Acquisition.
Substantial Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive three material benefits. These benefits include:
. With respect to our ownership in your Income Fund, we may be issued up to
19,087 APF Shares in accordance with the terms of your Income Fund's
partnership agreement. The 19,087 APF Shares issued to us will have an
estimated value, based on the exchange value, of approximately $381,740.
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr. Seneff
serving as Chairman of APF and Mr. Bourne serving as Vice Chairman.
Furthermore, they will be entitled to receive performance-based
incentives, including stock options, under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of the Income Funds, we are legally liable for all of
Income Funds liabilities to the extent that the Income Funds are unable
to satisfy such liabilities. Because the partnership agreement for each
Income Fund prohibits the Income Funds from incurring indebtedness, the
only liabilities the Income Funds have are liabilities with respect to
their ongoing business operations. In the event that one or more Income
Funds are acquired by APF, we would be relieved of our legal obligation
to satisfy the liabilities of the acquired Income Fund or Income Funds.
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Certain Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund. If
your Income Fund is acquired by APF, and you have voted "For" the Acquisition,
you will receive APF Shares. If you have voted "Against" the Acquisition but
your Income Fund is acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to
S-16
<PAGE>
you annually on a Schedule K-1. The character of the income that you recognize
depends upon the assets and activities of your Income Fund and may, in some
circumstances, be treated as income which may be offset by any losses you may
have from passive activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under certain circumstances, even
if APF were to make the same level of distributions as your Income Fund, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you. For certain other differences attributable to APF's status as a REIT,
see "--Taxation of APF" and "--Taxation of Stockholders--Taxable Domestic
Stockholders" in the consent solicitation.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain and loss based on the
exchange value, for an average $10,000 original Limited Partner investment in
your Income Fund, is set forth in the table below for those Limited Partners
subject to federal income taxation.
<TABLE>
<CAPTION>
Estimated Gain/(Loss)
per Average $10,000 Original
Limited Partner Investment(1)
-----------------------------
<S> <C>
CNL Income Fund VI, Ltd........................... $1,566
</TABLE>
- --------
(1) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be significantly below the exchange value.
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one more individuals or entities in exchange for the stock of that corporation,
and (2) immediately after the exchange, such individuals or entities are in
control of the corporation. For purposes of section 351(a), control is defined
as the ownership of stock possessing at least 80 percent of the total combined
voting power of all classes of stock entitled to vote and at least 80 percent
of the total number of shares of all other classes of stock of the corporation.
APF has represented to Shaw Pittman, APF's tax counsel, that, following the
Acquisition, the Limited Partners of the Income Funds will not own stock
possessing at least 80 percent of the total combined voting power of all
classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
S-17
<PAGE>
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if any,
assumed by the Operating Partnership, and
.the adjusted tax basis of the assets transferred by your Income Fund to the
Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2004, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses that
you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the notes may recognize gain in the year of the
Acquisition despite the fact that they will not receive cash with which to pay
the tax on the gain. Such Limited Partners will adjust the basis of the notes
as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes. See "--Tax Consequences of Liquidation and
Termination of Your Income Fund" below.
S-18
<PAGE>
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition, including gain or loss resulting from the Acquisition
described above. If your taxable year is not the calendar year, you could be
required to recognize as income in a single taxable year your share of your
Income Fund's income attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units. Your holding period for
the notes for purposes of determining capital gain or loss from the disposition
of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501(c)(7), (9), (17) or (20)
of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
For a discussion of the taxation of APF, see "Federal Income Tax
Considerations--Taxation of APF" in the consent solicitation.
S-19
<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 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 2,307,364 1,391,466 8,137 (2,450,663)(b),(c)
Interest and
Other Income..... 2,214,763 0 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 0 1,095,269 2,563,714 1,323,577 64,186 (377,734)(e)
Management and
Advisory Fees.... 697,364 0 697,364 0 0 611,196 (1,308,560)(f)
Fees to Related
Parties.......... 0 0 0 23,326 292,575 0 (292,786)(g)
Interest
Expense.......... 0 0 0 50,730 0 4,769,268 0
State Taxes...... 235,208 0 235,208 0 0 0 0
Depreciation--
Other............ 0 0 0 39,581 26,238 0 0
Depreciation--
Property......... 1,548,813 349,465(a) 1,898,278 0 0 0 0
Amortization..... 7,368 0 7,368 0 0 0 536,551 (h)
Transaction
Costs............ 125,926 0 125,926 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
Total Expenses.. 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650 (1,442,529)
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, and
Provision for
Losses on
Properties....... $10,688,823 $1,989,688 $12,678,511 $ (322,774) $ (121,562) $ (202,594) $ (946,066)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 0 17,271 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 (215,797) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
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) (946,066)
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) $(1,194,745)
=========== ========== =========== ========== ========== ========== ===========
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund VI, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $14,523,161 $ 721,992 $ 12,297 (j) $15,257,450
Fees............. 1,256,304 0 (13,437)(k) 1,242,867
Interest and
Other Income..... 7,687,325 15,456 0 7,702,781
------------ ---------- ------------------ ------------
Total Revenue... $23,466,790 $737,448 $ (1,140) $24,203,098
Expenses:
General and
Administrative... 4,669,012 45,493 (25,435)(l),(m) 4,689,070
Management and
Advisory Fees.... 0 0 0 (n) 0
Fees to Related
Parties.......... 23,115 0 0 23,115
Interest
Expense.......... 4,819,998 0 0 4,819,998
State Taxes...... 235,208 9,466 7,607 (o) 252,281
Depreciation--
Other............ 65,819 0 0 65,819
Depreciation--
Property......... 1,896,278 113,840 58,077 (p) 2,070,195
Amortization..... 543,919 413 0 544,332
Transaction
Costs............ 125,926 33,125 0 159,051
------------ ---------- ------------------ ------------
Total Expenses.. 12,381,275 202,337 40,249 12,623,861
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, and
Provision for
Losses on
Properties....... $11,085,515 $ 535,111 $ (41,389) $11,579,237
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 121,275 (14,631)(q) 123,915
Provision For
Loss on
Properties....... (215,797) 0 0 (215,797)
------------ ---------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 10,886,989 656,386 (56,020) 11,487,355
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ---------- ------------------ ------------
Net
Earnings(Losses).. $10,886,989 $ 656,386 $ (56,020) $11,487,355
============ ========== ================== ============
</TABLE>
S-20
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
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
============ =========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 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
============ =========== ============ ========== ========== ============ ===========
Weighted average
units
outstanding
during period... n/a n/a n/a n/a n/a n/a n/a
============ =========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,401 n/a 37,347,401 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 n/a 37,348,464 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... 14,237,405 n/a n/a n/a n/a n/a n/a
Cash
distributions
declared per
$10,000
Investment...... 191 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 $ -- $ -- $ -- $ 0
Mortgages/notes
receivable...... $ 41,269,740 0 $ 41,269,740 $ -- $ -- $247,896,287 $ 0
Receivables,
net............. $ 548,862 0 $ 548,862 $7,141,967 $5,457,493 $ 1,969,339 (148,629)(w)
Investment
in/due from
joint ventures.. $ 1,083,564 0 $ 1,083,564 $ -- $ -- $ -- 0
Total assets.... $708,694,145 $33,656,518(u) $742,350,663 $8,223,820 $6,308,406 $264,700,433 $31,770,205 (v1),(w)
Total
liabilities/minority
interest........ $ 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 $32,190,575 (v1),(x)
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund VI, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- ------------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 542 42 n/a 584
============== =========== ==================== ==================
Earnings per
share/unit...... $ n/a $ 9.38 $ n/a $ 0.25
============== =========== ==================== ==================
Book value per
share/unit...... $ n/a $ 406.63 $ n/a $ 16.39
============== =========== ==================== ==================
Dividends per
share/unit...... $ n/a $ 11.25 $ n/a $ n/a
============== =========== ==================== ==================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 3.26x
============== =========== ==================== ==================
Weighted average
units
outstanding
during period... n/a 70,000 n/a n/a
============== =========== ==================== ==================
Weighted average
shares
outstanding
during period... 43,497,401 n/a 1,844,144 45,341,545 (r)
============== =========== ==================== ==================
Shares
outstanding..... 43,498,464 n/a 1,844,144 45,342,608
============== =========== ==================== ==================
Cash
distributions
declared:....... n/a 787,500 n/a $ 19,843,874 (s)
==================
Cash
distributions
declared per
$10,000
Investment...... n/a 225 n/a $ 219 (t)
==================
Balance sheet
data:
Real estate
assets, net..... $ 647,547,023 $22,359,625 $10,680,361 (v2) $ 680,587,009
Mortgages/notes
receivable...... $ 289,166,027 $ -- $ 0 $ 289,166,027
Receivables,
net............. $ 14,969,032 $ 63,010 $ (9,648)(y) $ 15,022,394
Investment
in/due from
joint ventures.. $ 1,083,564 $ 5,064,213 $ 1,504,683 (v2) $ 7,652,460
Total assets.... $1,053,353,527 $29,499,872 $ 8,409,213 (v2),(y) $1,091,262,612
Total
liabilities/minority
interest........ 346,929,801 $ 1,035,856 $ (9,648)(y) $ 347,956,009
Total equity.... $ 706,423,726 $28,464,016 $ 8,418,861 (v2) $ 743,306,603
</TABLE>
S-21
<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
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<CAPTION>
<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 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
</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>
<CAPTION>
<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>
(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)
<TABLE>
<S> <C>
Amortization of goodwill $536,551
</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 $12,297 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the Income Fund as if the leases had been
acquired on January 1, 1998.
S-22
<PAGE>
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<CAPTION>
<S> <C>
Management fees $ 0
Reimbursement of administrative costs (13,437)
--------
$(13,437)
========
</TABLE>
(l) Represents the elimination of $13,437 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $11,998 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports
for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income Fund
to the Advisor.
(o) Represents additional state income taxes of $7,607 resulting from
assuming that acquisitions of properties that had been operational when
APF acquired them from January 1, 1999 through May 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 Fund 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 $58,077 as a result
of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated using
the straight-line method over the remaining useful lives of the
properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $14,631
as a result of adjusting the historical basis of the real estate owned
by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings owned indirectly by the
Income Fund is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(r) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 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.
S-23
<PAGE>
(v) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Income Fund Total
----------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Shares Offered 3,800,000 2,350,000 1,844,143.85 7,994,143.85
Exchange Value $20 $20 $20 $20
----------- ----------- ------------ ------------
Share Consideration $76,000,000 $47,000,000 $ 36,882,877 $159,882,877
Cash Consideration -- -- 421,000 421,000
APF Transaction Costs 5,074,288 3,138,046 2,490,666 10,703,000
----------- ----------- ------------ ------------
Total Purchase Price $81,074,288 $50,138,046 $ 39,794,543 $171,006,877
=========== =========== ============ ============
Allocation of Purchase
Price:
----------------------
Net Assets --
Historical $ 7,141,252 $10,006,878 $ 28,464,016 $ 45,612,146
Purchase Price
Adjustments:
Land and buildings on
operating leases 8,509,246 8,509,246
Net investment in
direct financing
leases 2,171,115 2,171,115
Investment in joint
ventures 1,504,683 1,504,683
Accrued rental income (809,258) (809,258)
Intangibles and other
assets (2,792,876) (45,259) (2,838,135)
Goodwill* 42,924,044 -- 42,924,044
Excess purchase price 73,933,036 -- -- 73,933,036
----------- ----------- ------------ ------------
Total Allocation $81,074,288 $50,138,046 $ 39,794,543 $171,006,877
=========== =========== ============ ============
</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 pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,933,036 was
expensed at March 31, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations". Goodwill of 42,924,044 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 73,933,036
Goodwill for CFC (Intangibles and other assets) 42,924,044
CFC/CFS Org Costs/Other Assets 2,792,876
Cash to pay APF transaction costs 8,212,334
APF Common Stock 61,500
APF APIC 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital 28,464,016
Land and buildings on operating leases 8,509,246
Net investment in direct financing leases 2,171,115
Investment in joint ventures 1,504,683
Accrued rental income 809,258
Intangibles and other assets 45,259
Cash to pay APF Transaction costs 2,490,666
Cash consideration to Income Funds 421,000
APF Common Stock 18,441
APF APIC 36,864,436
(To record acquisition of Income Fund)
</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 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.
(y) Represents the elimination by the Income Fund of $9,648 in related
party payables recorded as receivables by the Advisor.
S-24
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND VI, LTD.
The following table sets forth certain financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
VI, Ltd." in this supplement.
<TABLE>
<CAPTION>
Quarter Ended
March 31, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 858,723 $ 868,941 $ 3,370,532 $ 3,456,406 $ 3,565,493 $ 3,438,286 $ 3,468,897
Net income (2).......... 656,386 1,036,913 3,020,881 2,899,882 2,803,601 2,861,381 3,095,028
Cash distributions
declared (3)........... 787,500 787,500 3,220,000 3,150,000 3,220,000 3,150,000 3,150,000
Net income per unit (2). 9.28 14.69 42.75 41.06 39.65 40.47 43.80
Cash distributions
declared per
unit (2)............... 11.25 11.25 46.00 45.00 46.00 45.00 45.00
GAAP book value per
unit................... 406.63 414.91 408.50 411.35 414.92 420.87 424.99
Weighted average number
of Limited
Partner units
outstanding............ 70,000 70,000 70,000 70,000 70,000 70,000 70,000
<CAPTION>
March 31, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $29,499,872 $30,059,945 $29,655,896 $29,993,069 $30,129,286 $30,442,314 $30,754,999
Total partners' capital. 28,464,016 29,043,662 28,595,130 28,794,249 29,044,367 29,460,766 29,749,385
</TABLE>
- --------
(1) Revenues include equity in earnings of unconsolidated joint ventures and
minority interest in income of the consolidated joint venture.
(2) Net income for the quarter ended March 31, 1998, includes $345,122 from
gains on sale of land and building. Net income for the years ended December
31, 1997 and 1996, includes provision for loss on land and building of
$263,186 and $77,023, respectively. In addition, net income for the years
ended December 31, 1997, 1996 and 1995, includes $79,777, $1,706 and
$7,370, respectively, from a loss on sale of land and buildings. Net income
for the years ended December 31, 1998, 1997, 1995 and 1994, also includes
$345,122, $626,804, $103,283 and $332,664, respectively, from gains on sale
of land and buildings.
(3) Distributions for the years ended December 31, 1998 and 1996, include a
special distribution to the Limited Partners of $70,000, which represented
cumulative excess operating reserves.
S-25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND VI, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
August 17, 1988, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurant properties, as
well as land upon which restaurants were to be constructed, which are leased
primarily to operators of selected national and regional fast-food and family-
style restaurant chains. The leases are triple-net leases, with the lessees
generally responsible for all repairs and maintenance, property taxes,
insurance and utilities. As of 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.
S-26
<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
S-27
<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.
S-28
<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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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.
S-36
<PAGE>
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.
S-37
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998....... F-1
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998..................................................................... F-2
Condensed Statements of Partner's Capital for the Quarter Ended March 31,
1999 and for the Year Ended December 31, 1998............................ F-3
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998................................................................. F-4
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998............................................................ F-5
Report of Independent Accountants......................................... F-7
Balance Sheets as of December 31, 1998 and 1997........................... F-8
Statements of Income for the Years Ended December 31, 1998, 1997 and 1996. F-9
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996............................................................ F-10
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................. F-12
Unaudited Pro Forma Financial Information................................. F-23
Unaudited Pro Forma Balance Sheet as of December 31, 1999................. F-24
Unaudited Pro Forma Statement of Earnings for the Quarter Ended March 31,
1999..................................................................... F-26
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998..................................................................... F-28
Unaudited Pro Forma Statement of Cash Flows for the Quarter Ended
March 31, 1999........................................................... F-30
Unaudited Pro Forma Statement of Cash Flows for the Year Ended
December 31, 1998........................................................ F-32
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-34
</TABLE>
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
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-1
<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-2
<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-3
<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-4
<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-5
<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. 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-6
<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-7
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building..................................... $18,559,844 $20,785,684
Net investment in direct financing leases, less
allowance for impairment in carrying value............ 3,929,152 4,708,841
Investment in joint ventures........................... 5,021,121 1,130,139
Cash and cash equivalents.............................. 1,170,686 1,614,759
Restricted cash........................................ -- 709,227
Receivables, less allowance for doubtful accounts of
$323,813 and $363,410................................. 150,912 157,989
Prepaid expenses....................................... 949 4,235
Lease costs, less accumulated amortization of $7,181
and $5,581............................................ 10,519 12,119
Accrued rental income, less allowance for doubtful
accounts of $38,944 and $27,245....................... 785,982 843,345
Other assets........................................... 26,731 26,731
----------- -----------
$29,655,896 $29,993,069
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 8,173 $ 14,138
Accrued construction costs payable..................... -- 125,000
Accrued and escrowed real estate taxes payable......... 2,500 38,025
Due to related parties................................. 19,403 32,019
Distributions payable.................................. 857,500 787,500
Rents paid in advance and deposits..................... 28,241 57,663
----------- -----------
Total liabilities.................................. 915,817 1,054,345
Minority interest...................................... 144,949 144,475
Partners' capital...................................... 28,595,130 28,794,249
----------- -----------
$29,655,896 $29,993,069
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $2,520,346 $2,465,817 $2,776,776
Adjustments to accrued rental income.... (167,227) (17,548) (537)
Earned income from direct financing
leases................................. 470,258 449,133 557,426
Contingent rental income................ 156,676 147,437 110,073
Interest and other income............... 110,502 119,961 49,056
---------- ---------- ----------
3,090,555 3,164,800 3,492,794
---------- ---------- ----------
Expenses:
General operating and administrative.... 160,358 156,847 159,388
Professional services................... 32,400 25,861 32,272
Bad debt expense........................ 12,854 131,184 --
Real estate taxes....................... -- 43,676 --
State and other taxes................... 10,392 8,969 7,930
Depreciation and amortization........... 458,558 473,828 483,573
Transaction costs....................... 20,211 -- --
---------- ---------- ----------
694,773 840,365 683,163
---------- ---------- ----------
Income Before Minority Interest in Income
of Consolidated Joint Venture, Equity in
Earnings of Unconsolidated Joint
Ventures, Gain (Loss) on Sale of Land and
Buildings and Net Investment in Direct
Financing Leases and Provision for Loss
on Land and Building and Impairment in
Carrying Value of Net Investment in
Direct Financing Lease................... 2,395,782 2,324,435 2,809,631
Minority interest in Income of Consoli-
dated Joint Venture...................... (43,128) 11,275 (24,682)
Equity in Earnings of Unconsolidated Joint
Ventures................................. 323,105 280,331 97,381
Gain (Loss) on Sale of Land and Buildings
and Net Investment in Direct Financing
Leases................................... 345,122 547,027 (1,706)
Provision for Loss on Land and Buildings
and Impairment in Carrying Value of Net
Investment in Direct Financing Lease..... -- (263,186) (77,023)
---------- ---------- ----------
Net Income................................ $3,020,881 $2,899,882 $2,803,601
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 28,327 $ 25,353 $ 28,337
Limited partners........................ 2,992,554 2,874,529 2,775,264
---------- ---------- ----------
$3,020,881 $2,899,882 $2,803,601
========== ========== ==========
Net Income Per Limited Partner Unit....... $ 42.75 $ 41.06 $ 39.65
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................ 70,000 70,000 70,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1995...... $1,000 $174,673 $35,000,000 $(19,214,226) $17,514,319 $(4,015,000) $29,460,766
Distributions to
limited partners
($46.00 per limited
partner unit)......... -- -- -- (3,220,000) -- -- (3,220,000)
Net income............. -- 28,337 -- -- 2,775,264 -- 2,803,601
------ -------- ----------- ------------ ----------- ----------- -----------
Balance,
December 31, 1996...... 1,000 203,010 35,000,000 (22,434,226) 20,289,583 (4,015,000) 29,044,367
Distributions to
limited partners
($45.00 per limited
partner unit)......... -- -- -- (3,150,000) -- -- (3,150,000)
Net income............. -- 25,353 -- -- 2,874,529 -- 2,899,882
------ -------- ----------- ------------ ----------- ----------- -----------
Balance,
December 31, 1997...... 1,000 228,363 35,000,000 (25,584,226) 23,164,112 (4,015,000) 28,794,249
Distributions to
limited partners
($46.00 per limited
partner unit)......... -- -- -- (3,220,000) -- -- (3,220,000)
Net income............. -- 28,327 -- -- 2,992,554 -- 3,020,881
------ -------- ----------- ------------ ----------- ----------- -----------
Balance,
December 31, 1998...... $1,000 $256,690 $35,000,000 $(28,804,226) $26,156,666 $(4,015,000) $28,595,130
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants........... $ 3,092,644 $ 3,097,751 $ 3,363,188
Distributions from unconsolidated
joint ventures...................... 328,721 144,016 114,163
Cash paid for expenses............... (270,339) (180,530) (203,432)
Interest received.................... 92,634 94,804 36,843
----------- ----------- -----------
Net cash provided by operating
activities........................ 3,243,660 3,156,041 3,310,762
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
buildings........................... 2,832,253 4,003,985 982,980
Additions to land and buildings on
operating leases.................... (125,000) (2,666,258) --
Investment in direct financing
leases.............................. -- (1,057,282) --
Investment in joint ventures......... (3,896,598) (521,867) (146,090)
Return of capital from joint
ventures............................ (84) 524,975 --
Collections on mortgage note
receivable.......................... -- -- 3,033
Decrease (increase) in restricted
cash................................ 697,650 279,367 (977,017)
Payment of lease costs............... (3,300) (3,300) (3,300)
----------- ----------- -----------
Net cash provided by (used in)
investing activities.............. (495,079) 559,620 (140,394)
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners.... (3,150,000) (3,220,000) (3,150,000)
Distributions to holder of minority
interest............................ (42,654) (8,832) (13,437)
----------- ----------- -----------
Net cash used in financing
activities........................ (3,192,654) (3,228,832) (3,163,437)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ (444,073) 486,829 6,931
Cash and Cash Equivalents at Beginning
of Year................................ 1,614,759 1,127,930 1,120,999
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,170,686 $ 1,614,759 $ 1,127,930
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 3,020,881 $ 2,899,882 $ 2,803,601
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense..................... 12,854 131,184 --
Depreciation......................... 456,958 471,938 481,683
Amortization......................... 1,600 1,890 1,890
Minority interest in income of
consolidated joint venture.......... 43,128 (11,275) 24,682
Equity in earnings of unconsolidated
joint ventures, net of
distributions....................... 5,616 (136,315) 16,782
Loss (gain) on sale of land and
building............................ (345,122) (547,027) 1,706
Provision for loss on land and
building and impairment in carrying
value of net investment in direct
financing lease..................... -- 263,186 77,023
Decrease (increase) in receivables... 8,649 17,113 (90,360)
Decrease (increase) in prepaid
expenses............................ 3,286 (3,072) 4,087
Decrease in net investment in direct
financing leases.................... 63,868 67,389 68,177
Decrease (increase) in accrued rental
income.............................. 51,142 (81,244) (103,935)
Increase (decrease) in accounts
payable and accrued expenses........ (37,246) 25,964 2,529
Increase (decrease) in due to related
parties............................. (12,532) 29,470 (3,391)
Increase (decrease) in rents paid in
advance and deposits................ (29,422) 26,958 26,288
----------- ----------- -----------
Total adjustments.................. 222,779 256,159 507,161
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,243,660 $ 3,156,041 $ 3,310,762
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Distributions declared and unpaid at
December 31........................... $ 857,500 $ 787,500 $ 857,500
=========== =========== ===========
</TABLE>
See accompanying notes fo financial statements.
F-11
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund VI, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
method. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset)
(Note 4). Unearned income is deferred and amortized to income over the
lease terms so as to produce a constant periodic rate of return on the
Partnership's investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review the properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through operations. The general partners determine whether an
impairment in value has occurred by comparing the estimated future undiscounted
cash flows, including the residual value of the property, with the carrying
cost of the individual property. If an impairment is indicated, the assets are
adjusted to their fair value. Although the general partners have made their
best estimate of these factors based on current conditions, it is reasonably
possible that changes could occur in the near term which could adversely affect
the general partners' best estimate of net cash flows expected to be generated
from its properties and the need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables and accrued rental
income, and to decrease rental or other income or increase bad debt expense for
the current
F-12
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
period, although the Partnership continues to pursue collection of such
amounts. If amounts are subsequently determined to be uncollectible, the
corresponding receivable and allowance for doubtful accounts are decreased
accordingly.
Investment in Joint Ventures--The Partnership accounts for its approximate
66 percent interest in Caro Joint Venture, a Florida general partnership, using
the consolidation method. Minority interest represents the minority joint
venture partner's proportionate share of equity in the Partnership's
consolidated joint venture. All significant intercompany accounts and
transactions have been eliminated.
The Partnership's investments in Auburn Joint Venture, Show Low Joint
Venture, Asheville Joint Venture, Warren Joint Venture, and Melbourne Joint
Venture and properties in Clinton, North Carolina, Vancouver, Washington;
Overland Park, Kansas; Memphis, Tennessee and Fort Myers, Florida, each of
which is held as tenants-in-common with affiliates, are accounted for using the
equity method since the Partnership shares control with the affiliates.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Lease Costs--Brokerage fees and lease incentive costs incurred in finding
new tenants and negotiating new leases for the Partnership's properties are
amortized over the terms of the new leases using the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
F-13
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
2. Leases:
The Partnership leases its land and buildings primarily to operators of
national and regional fast-food and family-style restaurants. The leases are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 13, "Accounting for Leases." The leases generally are classified
as operating leases; however, some leases have been classified as direct
financing leases. For the leases classified as direct financing leases, the
building portions of the property leases are accounted for as direct financing
leases while the land portions of some of these leases are operating leases.
Substantially all leases are for 10 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant pays all property taxes and
assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew the
leases for two to four successive five-year periods subject to the same terms
and conditions as the initial lease. Most leases also allow the tenant to
purchase the property at fair market value after a specified portion of the
lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land.................... $ 8,558,191 $10,046,309
Buildings............... 13,587,739 14,344,114
----------- -----------
22,145,930 24,390,423
Less accumulated
depreciation........... (3,586,086) (3,327,334)
----------- -----------
18,559,844 21,063,089
Less allowance for loss
on land and building... -- (277,405)
----------- -----------
$18,559,844 $20,785,684
=========== ===========
</TABLE>
In February 1997, the Partnership reinvested the net sales proceeds from the
sale of a property in Dallas, Texas, along with additional funds, in a
Bertucci's property in Marietta, Georgia, for a total cost of approximately
$1,112,600.
In July 1997, the Partnership sold the property in Whitehall, Michigan, to a
third party, for $665,000 and received net sales proceeds of $626,907,
resulting in a loss of $79,777 for financial reporting purposes.
In addition, in July 1997, the Partnership sold its property in Naples,
Florida, to a third party, for $1,530,000 and received net sales proceeds of
$1,477,780, resulting in a gain of $186,550 for financial reporting purposes.
This property was originally acquired by the Partnership in December 1989 and
had a cost of approximately $1,083,900, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the partnership sold the
property for approximately $403,800 in excess of its original purchase price.
In December 1997, the Partnership reinvested the net sales proceeds in an IHOP
property in Elgin, Illinois, for a total cost of approximately $1,484,100.
In July 1997, the Partnership entered into a new lease for the property in
Greensburg, Indiana, with a new tenant to operate the property as an Arby's
restaurant. In connection therewith, the Partnership incurred $125,000 in
renovation costs, which were paid in 1998.
F-14
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In September 1997, the Partnership sold its property in Venice, Florida, to
a third party, for $1,245,000 and received net sales proceeds of $1,201,648,
resulting in a gain of $283,853 for financial reporting purposes. This property
was originally acquired by the Partnership in August 1989 and had a cost of
approximately $1,032,400, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $174,300 in excess of its original purchase price. In December
1997, the Partnership reinvested the net sales proceeds in an IHOP property in
Manassas, Virginia, for a total cost of approximately $1,126,800.
In 1997, the Partnership recorded a provision for loss on land and building
in the amount of $104,947 for financial reporting purposes for the property in
Liverpool, New York. The terms of this lease were terminated in December 1996.
This allowance represented the difference between (i) the property's carrying
value at December 31, 1997, and (ii) the net realizable value of the property
based on the net sales proceeds of $145,221 received in February 1998 from the
sale of the property. Due to the fact that in 1997 and prior years, the
Partnership had recorded an allowance for loss totalling $181,970 for this
property, no gain or loss was recognized for financial reporting purposes
during 1998 relating to the sale of this Property in February 1998.
During 1997, the Partnership established an allowance for loss on land in
the amount of $95,435 for its property in Melbourne, Florida. The tenant of
this Property vacated the property in October 1997 and ceased making rental
payments. The allowance represents the difference between the property's
carrying value for the land at December 31, 1997, and the net realizable value
of the land based on the net sales proceeds of $552,910 received in February
1998 from the sale of the property. No gain or loss was recognized for
financial reporting purposes relating to the sale of this property in February
1998.
In January 1998, the Partnership sold its property in Deland, Florida, to
the tenant for $1,250,000 and received net sales proceeds of $1,234,122,
resulting in a gain of $345,122 for financial reporting purposes. This property
was originally acquired by the Partnership in October 1989 and had a cost of
approximately $1,000,000, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $234,100 in excess of its original purchase price. In June 1998,
the Partnership sold its property in Bellevue, Nebraska, and received sales
proceeds of $900,000. Due to the fact that during 1998, the Partnership wrote
off $155,528 in accrued rental income, representing the majority of the accrued
rental income that the Partnership had recognized since the inception of the
lease relating to the straight-lining of future scheduled rent increases in
accordance with generally accepted accounting principles, no gain or loss was
recorded for financial reporting purposes in June 1998 relating to this sale.
This property was originally acquired by the Partnership in December 1989 and
had a cost of approximately $899,500, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold the
property for approximately $500 in excess of its original purchase price.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998, 1997, and 1996, the Partnership recognized a loss of $51,142 (net of
$155,528 in write-offs and $11,699 in reserves), and income of $81,244 (net of
$17,548 in reserves) and $103,935 (net of $537 in reserves), respectively, of
such rental income.
F-15
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999........................................................... $ 2,329,253
2000........................................................... 2,402,277
2001........................................................... 2,451,812
2002........................................................... 2,466,895
2003........................................................... 2,458,306
Thereafter..................................................... 11,370,855
-----------
$23,479,398
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Minimum lease payments receivable............... $ 7,212,677 $ 9,313,752
Estimated residual values....................... 1,440,446 1,655,911
Less unearned income............................ (4,723,971) (6,198,018)
----------- -----------
3,929,152 4,771,645
Less allowance for impairment in carrying val-
ue............................................. -- (62,804)
----------- -----------
Net investment in direct financing leases....... $ 3,929,152 $ 4,708,841
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................ $ 486,632
2000............................................................ 488,772
2001............................................................ 501,492
2002............................................................ 501,492
2003............................................................ 501,492
Thereafter...................................................... 4,732,797
----------
$7,212,677
==========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(See Note 3).
In July 1997, the Partnership sold its property in Naples, Florida, for
which the building portion had been classified as a direct financing lease. In
connection therewith, the gross investment (minimum lease payments receivable
and estimated residual values) and unearned income relating to this property
were removed from the accounts and the gain from the sale relating to this
property was reflected in income (Note 3).
F-16
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In addition, in July 1997, the Partnership sold its property in Plattsmouth,
Nebraska, to the tenant, for $700,000 and received net sales proceeds of
$697,650, resulting in a gain of $156,401 for financial reporting purposes.
This property was originally acquired by the Partnership in January 1990 and
had a cost of approximately $561,000, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold the
property for approximately $138,400 in excess of its original purchase price.
At December 31, 1997, the Partnership had established an allowance for
impairment in carrying value in the amount of $62,804 for its property in
Melbourne, Florida. The allowance represents the difference between (i) the
carrying value of the net investment in the direct financing lease at December
31, 1997, and (ii) the net realizable value of the net investment in the direct
financing lease based on the net sales proceeds received in February 1998 from
the sale of the property (see Note 3).
In June 1998, the Partnership sold its property in Bellevue, Nebraska, for
which the building portion had been classified as a direct financing lease. In
connection therewith, the gross investment (minimum lease payments receivable
and estimated residual value) and unearned income relating to this property
were removed from the accounts (see Note 3).
5. Investment in Joint Ventures:
The Partnership has a 3.9%, a 36 percent, a 14.46%, and an 18 percent
interest in the profits and losses of Auburn Joint Venture, Show Low Joint
Venture, Asheville Joint Venture, and a property in Clinton, North Carolina,
held as tenants-in-common, respectively. The remaining interests in these joint
ventures and the property held as tenants in common are held by affiliates of
the Partnership which have the same general partners.
In January 1997, Show Low Joint Venture, in which the Partnership owns a 36
percent interest, sold its property to the tenant for $970,000, resulting in a
gain to the joint venture of approximately $360,000 for financial reporting
purposes. The property was originally contributed to Show Low Joint Venture in
July 1990 and had a cost of approximately $663,500, excluding acquisition fees
and miscellaneous acquisition expenses; therefore, the joint venture sold the
property for approximately $306,500 in excess of its original purchase price.
In June 1997, Show Low Joint Venture reinvested $782,413 of net sales proceeds
in a property in Greensboro, North Carolina. During 1997, the Partnership
received approximately $70,000 representing a return of capital, for its pro-
rata share of the uninvested net sales proceeds.
In October 1997, the Partnership and an affiliate, as tenants-in-common,
sold the property in Yuma, Arizona, in which the Partnership owned a 51.67%
interest, for a total sales price of $1,010,000 and received net sales proceeds
of $982,025, resulting in a gain, to the tenancy-in-common, of approximately
$128,400 for financial reporting purposes. The property was originally acquired
in July 1994 and had a total cost of approximately $861,700, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
property was sold for approximately $120,300 in excess of its original purchase
price. The Partnership received approximately $455,000 representing a return of
capital for its pro-rata share of the net sales proceeds. In December 1997, the
Partnership reinvested the amounts received as a return of capital from the
sale of the Yuma, Arizona property, in a property in Vancouver, Washington, as
tenants-in-common with affiliates of the general partners. The Partnership
accounts for its investment in the property in Vancouver, Washington, using the
equity method since the Partnership shares control with affiliates, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 23.04% interest in the Vancouver,
Washington, property owned with affiliates as tenants-in-common.
F-17
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In January 1998, the Partnership contributed approximately $558,800 and
$694,800 to acquire a property in Overland Park, Kansas, and a property in
Memphis, Tennessee, respectively, as tenants-in-common with affiliates of the
general partners. As of December 31, 1998, the Partnership had a 34.74% and a
46.2% interest in the property in Overland Park, Kansas and Memphis, Tennessee,
respectively. In June 1998, the Partnership contributed approximately
$1,249,300 to acquire a property in Fort Myers, Florida, as tenants-in-common
with an affiliate of the general partners. As of December 31, 1998, the
Partnership had an 85 percent interest in the property in Fort Myers, Florida.
The Partnership accounts for its investments in these properties using the
equity method since the Partnership shares control with affiliates, and amounts
relating to its investments are included in investment in joint ventures.
In April 1998, the Partnership entered into a joint venture arrangement,
Melbourne Joint Venture, with an affiliate of the general partners, to
construct and hold one restaurant property. As of December 31, 1998, the
Partnership had contributed approximately $494,900 to purchase land and pay
construction costs relating to the property owned by the joint venture and has
agreed to contribute an additional $31,300 to fund additional construction
costs to the joint venture. At December 31, 1998, the Partnership had an
approximate 50 percent interest in the profits and losses of the joint venture.
The Partnership accounts for its investment in this joint venture under the
equity method since the Partnership shares control with the affiliate.
In September 1998, the Partnership entered into a joint venture arrangement,
Warren Joint Venture, with an affiliate of the general partners to hold one
restaurant property. As of December 31, 1998, the Partnership had contributed
approximately $898,100 to the joint venture to acquire the restaurant property.
As of December 31, 1998, the Partnership owned a 64.29% interest in the profits
and losses of the joint venture. The Partnership accounts for its investment in
this joint venture under the equity method since the Partnership shares control
with the affiliate.
Auburn Joint Venture, Show Low Joint Venture, Asheville Joint Venture,
Melbourne Joint Venture, Warren Joint Venture, and the Partnership and
affiliates as tenants-in-common in five separate tenancy-in-common
arrangements, each own and lease one property to an operator of national fast-
food and family-style restaurants. The following presents the combined,
condensed financial information for the joint ventures and the properties held
as tenants-in-common with affiliates at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $ 9,030,392 $4,568,842
Net investment in direct financing leases......... 3,331,869 911,559
Cash.............................................. 12,138 7,991
Receivables....................................... 56,360 22,230
Accrued rental income............................. 237,451 160,197
Other assets...................................... 1,190 414
Liabilities....................................... 105,868 7,557
Partners' capital................................. 12,563,532 5,663,676
Revenues.......................................... 1,098,957 471,627
Gain on sale of land and building................. -- 488,372
Net income........................................ 959,057 889,883
</TABLE>
The Partnership recognized income totalling $323,105, $280,331, and $97,381
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
F-18
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
6. Restricted Cash:
As of December 31, 1997, net sales proceeds of $697,650 from the sale of the
property in Plattsmouth, Nebraska, plus accrued interest of $11,577, were being
held in an interest-bearing escrow account pending the release of funds by the
escrow agent to acquire an additional property. In January 1998, the escrow
agent released these funds to acquire the property in Memphis, Tennessee, with
affiliates of the general partners, as tenants-in-common.
7. Receivables:
In June 1997, the Partnership terminated the lease with the tenant of the
property in Greensburg, Indiana. In connection therewith, the Partnership
accepted a promissory note from this former tenant for $13,077 for amounts
relating to past due real estate taxes the Partnership had incurred as a result
of the former tenant's financial difficulties. The promissory note, which is
uncollateralized, bears interest at a rate of ten percent per annum and is
being collected in 36 monthly installments. Receivables at December 31, 1998
and 1997, included $9,561 and $13,631, respectively, of such amounts, including
accrued interest of $554 in 1997.
8. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their 10%
Preferred Return, plus the return of their adjusted capital contributions. The
general partners will then receive, to the extent previously subordinated and
unpaid, a one percent interest in all prior distributions of net cash flow and
a return of their capital contributions. Any remaining sales proceeds will be
distributed 95 percent to the limited partners and five percent to the general
partners. Any gain from the sale of a property not in liquidation of the
Partnership is, in general, allocated in the same manner as net sales proceeds
are distributable. Any loss from the sale of a property is, in general,
allocated first, on a pro rata basis, to partners with positive balances in
their capital accounts; and thereafter, 95 percent to the limited partners and
five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the years ended December 31, 1998, 1997, and 1996 the Partnership
declared distributions to the limited partners of $3,220,000, $3,150,000 and
$3,220,000, respectively. No distributions have been made to the general
partners to date.
F-19
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
9. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.............................. $3,020,881 $2,899,882 $2,803,601
Depreciation for tax reporting purposes
in excess of depreciation for
financial reporting purposes.......... (65,666) (92,303) (104,412)
Allowance for loss on land and
building.............................. -- 263,186 77,023
Direct financing leases recorded as
operating leases for tax
reporting purposes.................... 63,868 67,392 68,177
Gain and loss on sale of land and
buildings for financial
reporting purposes in excess of gain
and loss on sale for
tax reporting purposes................ (543,697) (335,658) 1,706
Equity in earnings of unconsolidated
joint ventures for financial reporting
purposes in excess of equity
in earnings of unconsolidated joint
ventures for tax reporting purposes... (14,400) (147,256) (49)
Allowance for doubtful accounts........ (39,597) 369,935 (78,517)
Accrued rental income.................. 51,142 (81,244) (103,935)
Rents paid in advance.................. (30,922) 26,458 26,288
Capitalization of transaction costs for
tax reporting purposes................ 20,211 -- --
Minority interest in timing differences
of consolidated joint venture......... 14,513 (30,778) 1,781
---------- ---------- ----------
Net income for federal income tax
purposes.............................. $2,476,333 $2,939,614 $2,691,663
========== ========== ==========
</TABLE>
10. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors,
Inc. During the years ended December 31, 1998, 1997, and 1996, CNL Fund
Advisors, Inc. (hereinafter referred to as the "Affiliate") performed certain
services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate a management fee of one percent of the sum of gross
revenues from properties wholly owned by the Partnership and the Partnership's
allocable share of gross revenues from joint ventures and the property held as
tenants-in-common with an affiliate, but not in excess of competitive fees for
comparable services. These fees are payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners have not received their 10% Preferred
Return in any particular year, no management fees will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1998, 1997, and 1996.
F-20
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the sales proceeds are
reinvested in a replacement property, no such real estate disposition fees
will be incurred until such replacement property is sold and the net sales
proceeds are distributed. The payment of the real estate disposition fee is
subordinated to receipt by the limited partners of their aggregate 10%
Preferred Return, plus their adjusted capital contributions. No deferred,
subordinated real estate disposition fees have been incurred since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-
to-day basis. The Partnership incurred $107,969, $87,877 and $95,420 for the
years ended December 31, 1998, 1997, and 1996, respectively, for such
services.
The due to related parties at December 31, 1998 and 1997, totalled $19,403
and $32,019, respectively.
11. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from joint ventures and the properties
held as tenants-in-common with affiliates), for each of the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation...................... $758,646 $751,866 $758,348
IHOP Properties, Inc........................... 454,889 N/A --
Mid-America Corporation........................ 439,519 439,519 439,519
Restaurant Management Services, Inc............ 438,257 478,750 511,040
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from joint ventures and the properties
held as tenants-in-common with affiliates), for each of the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants.... $758,646 $751,866 $758,348
IHOP Properties, Inc........................... 454,889 N/A --
Burger King.................................... 453,634 496,487 455,764
Denny's........................................ N/A 317,041 N/A
Hardee's....................................... N/A N/A 410,951
</TABLE>
The information denoted by N/A indicates that for each period presented,
the tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of
restaurant concepts, default by any one of these lessees or restaurant chains
could significantly impact the results of operations of the Partnership if the
Partnership is not able to release the properties in a timely manner.
F-21
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
12. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 3,730,388 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $36,721,726 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
13. Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 12 being adjusted to 1,865,194 shares valued at $20.00 per
APF share.
F-22
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of the Advisor
and the CNL Restaurant Financial Services Group, and the acquisition of the
Income Fund (the acquisition of the Income Fund is referred to as the
"Acquisition"), and is based on estimates and assumptions set forth below in
the notes to such information which included pro forma adjustments. This
unaudited pro forma financial information has been prepared utilizing the
historical financial statements of APF, the historical combined financial
information of the Income Fund, the Advisor and CNL Restaurant Financial
Services Group (shown separately as CFS and CFC) and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, Income Fund, Advisor and CNL Restaurant Financial Services Group. The
pro forma balance sheet assumes that the Acquisition occurred on 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.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of March 31, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------ ------------ ------------ ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Buildingon
operating leases (net
depreciation).......... $475,787,661 $ 58,749,637(A) $534,537,298 $ 0 $ 0 $ 0
Net Investment in
Diresct Financing
Leases................. 123,270,117 0 123,270,117 0 0 0
Mortgages and Notes
Receivable............. 41,269,740 0 41,269,740 0 0 247,896,287
Other Investments....... 16,199,792 0 16,199,792 0 0 6,353,482
Investment In Joint
Ventures............... 1,083,564 0 1,083,564 0 0 0
Cash and Cash
Equivalents............ 35,796,119 (25,093,119)(A) 10,703,000 591,712 552,415 4,896,688
Restricted
Cash/Certificates of
Deposit................ 2,007,278 0 2,007,278 0 0 853,243
Receivables (net
allowances)/Due from
Related Party.......... 548,862 0 548,862 7,141,967 5,457,493 1,969,339
Accrued Rental Income... 5,007,334 0 5,007,334 0 0 0
Other Assets............ 7,723,678 0 7,723,678 490,141 298,498 2,731,394
Goodwill................ 0 0 0 0 0 0
------------ ------------ ------------ ---------- ---------- ------------
Total Assets........... $708,694,145 $ 33,656,518 $742,350,663 $8,223,820 $6,308,406 $264,700,433
============ ============ ============ ========== ========== ============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 3,464,190 $ 0 $ 3,464,190 $ 576,531 $ 304,375 $ 1,613,959
Accrued Construction
Costs Payable.......... 10,172,169 0 10,172,169 0 0 0
Distributions Payable... 0 0 0 119,808 0 0
Due to Related Parties.. 148,629 0 148,629 0 563,724 31,310,681
Income Tax Payable...... 0 0 0 0 0 271,741
Line of Credit/Notes
payable................ 34,150,000 33,656,518(A) 67,806,518 386,229 0 226,937,481
Deferred Income......... 2,052,530 0 2,052,530 0 0 0
Rents Paid in Advance... 1,340,636 0 1,340,636 0 0 0
Minority Interest....... 280,970 0 280,970 0 0 0
Common Stock............ 373,483 0 373,483 0 0 0
Common Stock--Class A... 0 0 0 6,400 2,000 200
Common Stock--Class B... 0 0 0 3,600 724 501
Additional Paid-in-
capital................ 670,005,177 0 670,005,177 4,617,047 5,303,503 3,937,095
Accumulated
distributions in excess
of net earnings........ (13,293,639) 0 (13,293,639) 2,514,205 134,080 628,775
Partners Capital........ 0 0 0 0 0 0
------------ ------------ ------------ ---------- ---------- ------------
Total Liabilities and
Equity................ $708,694,145 $ 33,656,518 $742,350,663 $8,223,820 $6,308,406 $264,700,433
============ ============ ============ ========== ========== ============
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of March 31, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund VI, Ltd. Adjustments Pro Forma
----------- -------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... $ 0 $ 534,537,298 $18,446,004 $ 8,509,246 (B2) $ 561,492,548
Net Investment in Direct
Financing Leases....... 0 123,270,117 3,913,621 2,171,115 (B2) 129,354,853
Mortgages and Notes
Receivable............. 0 289,166,027 -- 0 289,166,027
Other Investments....... 0 22,553,274 0 0 22,553,274
Investment In Joint
Ventures............... 0 1,083,564 5,064,213 1,504,683 (B2) 7,652,460
Cash and Cash
Equivalents............ (8,212,334)(B1) 8,531,481 1,158,507 (2,490,666)(B2) 6,778,322
(421,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 0 2,860,521 -- 0 2,860,521
Receivables (net
allowances)/Due from
Related Party.......... (148,629)(C) 14,969,032 63,010 (9,648)(E) 15,022,394
Accrued Rental Income... 0 5,007,334 809,258 (809,258)(B2) 5,007,334
Other Assets............ (2,792,876)(B1) 8,450,835 45,259 (45,259)(B2) 8,450,835
Goodwill................ 42,924,044 (B1) 42,924,044 0 0 42,924,044
----------- -------------- ----------- ------------ --------------
Total Assets........... $31,770,205 $1,053,353,527 $29,499,872 $ 8,409,213 $1,091,262,612
=========== ============== =========== ============ ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 0 $ 5,959,055 $ 43,817 $ 0 $ 6,002,872
Accrued Construction
Costs Payable.......... 0 10,172,169 0 0 10,172,169
Distributions Payable... 0 119,808 787,500 0 907,308
Due to Related Parties.. (148,629)(C) 31,874,405 9,648 (9,648)(E) 31,874,405
Income Tax Payable...... (271,741)(D) 0 0 0 0
Line of Credit/Notes
payable................ 0 295,130,228 0 0 295,130,228
Deferred Income......... 0 2,052,530 0 0 2,052,530
Rents Paid in Advance... 0 1,340,636 47,442 0 1,388,078
Minority Interest....... 0 280,970 147,449 0 428,419
Common Stock............ 61,500 (B1) 808,469 0 18,441 (B2) 453,424
Common Stock--Class A... (8,600)(B1) 0 0 0 0
Common Stock--Class B... (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 122,938,500 (B1) 792,943,677 0 36,864,436 (B2) 829,808,113
(13,857,645)(B1)
Accumulated
distributions in excess
of net earnings........ (3,277,060)(B1) (86,954,934) 0 0 (86,954,934)
(73,933,036)(B1)
271,741 (D)
Partners Capital........ 0 0 28,464,016 (28,464,016)(B2) 0
----------- -------------- ----------- ------------ --------------
Total Liabilities and
Equity................ $31,770,205 $1,053,353,527 $29,499,872 $ 8,409,213 $1,091,262,612
=========== ============== =========== ============ ==============
</TABLE>
F-25
<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
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................. $12,184,008 $2,339,153(a) $14,523,161 $ 0 $ 0 $ 0
Fees.................... 0 0 0 2,307,364 1,391,466 8,137
Interest and Other
Income................. 2,214,763 0 2,214,763 47,213 129,362 5,233,919
----------- ---------- ----------- ---------- ---------- ----------
Total Revenue.......... $14,398,771 $2,339,153 $16,737,924 $2,354,577 $1,520,828 $5,242,056
Expenses:
General and
Administrative
Expenses............... 1,095,269 0 1,095,269 2,563,714 1,323,577 64,186
Management and Advisory
Fees................... 697,364 0 697,364 0 0 611,196
Fees Paid to Related
Parties................ 0 0 0 23,326 292,575 0
Interest Expense........ 0 0 0 50,730 0 4,769,268
State Taxes............. 235,208 0 235,208 0 0 0
Depreciation--Other..... 0 0 0 39,581 26,238 0
Depreciation--Property.. 1,548,813 349,465(a) 1,898,278 0 0 0
Amortization............ 7,368 0 7,368 0 0 0
Transaction Costs....... 125,926 0 125,926 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
Total Expenses......... 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, 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)
Equity Earnings of joint
Ventures/Minority
Interest............... 17,271 0 17,271 0 0 0
Gain on Sale of
Properties............. 0 0 0 0 0 0
Provision For Loss on
Properties............. (215,797) 0 (215,797) 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
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)
Benefit/(Provision) for
Federal Income Taxes... 0 0 0 127,496 48,017 73,166
----------- ---------- ----------- ---------- ---------- ----------
Net Earnings (Losses)... $10,490,297 $1,989,688 $12,479,985 $ (195,278) $ (73,545) $ (129,428)
=========== ========== =========== ========== ========== ==========
Earnings Per Share/Unit. $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ==========
Book Value Per
Share/Unit............. $ 17.59 $ 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
=========== ========== =========== ========== ========== ==========
Ratio of Earnings to
Fixed Charges.......... 50.03x n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========== ==========
Wtd. Avg. Units
Outstanding............ 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
=========== ========== =========== ========== ========== ==========
Shares Outstanding...... 37,348,464 n/a 37,348,464 n/a n/a n/a
=========== ========== =========== ========== ========== ==========
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 Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000 Investment.
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund VI, Ltd. Adjustments Pro Forma
----------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................. $ 0 $14,523,161 $721,992 $ 12,297 (j) $ 15,257,450
Fees.................... (2,450,663)(b),(c) 1,256,304 0 (13,437)(k) 1,242,867
Interest and Other
Income................. 62,068 (d) 7,687,325 15,456 0 7,702,781
----------- ----------- -------- --------- ------------
Total Revenue.......... $(2,388,595) $23,466,790 $737,448 $ (1,140) $ 24,203,098
Expenses:
General and
Administrative
Expenses............... (377,734)(e) 4,669,012 45,493 (25,435)(l),(m) 4,689,070
Management and Advisory
Fees................... (1,308,560)(f) 0 0 0 (n) 0
Fees Paid to Related
Parties................ (292,786)(g) 23,115 0 0 23,115
Interest Expense........ 0 4,819,998 0 0 4,819,998
State Taxes............. 0 235,208 9,466 7,607 (o) 252,281
Depreciation--Other..... 0 65,819 0 0 65,819
Depreciation--Property.. 0 1,898,278 113,840 58,077 (p) 2,070,195
Amortization............ 536,551 (h) 543,919 413 0 544,332
Transaction Costs....... 0 125,926 33,125 0 159,051
----------- ----------- -------- --------- ------------
Total Expenses......... (1,442,529) 12,381,275 202,337 40,249 12,623,861
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties and
Provision for Losses on
Properties ............ $ (946,066) $11,085,515 $535,111 $ (41,389) $ 11,579,237
Equity Earnings of joint
Ventures/Minority
Interest............... 0 17,271 121,275 (14,631)(q) 123,915
Gain on Sale of
Properties............. 0 0 0 0 0
Provision For Loss on
Properties............. 0 (215,797) 0 0 (215,797)
----------- ----------- -------- --------- ------------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (946,066) 10,886,989 656,386 (56,020) 11,487,355
Benefit/(Provision) for
Federal Income Taxes... (248,679)(i) 0 0 0 0
----------- ----------- -------- --------- ------------
Net Earnings (Losses)... $(1,194,745) $10,886,989 $656,386 $ (56,020) $ 11,487,355
=========== =========== ======== ========= ============
Earnings Per Share/Unit. $ n/a $ n/a $ 9.38 $ n/a $ 0.25
=========== =========== ======== ========= ============
Book Value Per
Share/Unit............. $ n/a $ n/a $ 406.63 $ n/a $ 16.39
=========== =========== ======== ========= ============
Dividends Per
Share/Unit............. $ n/a $ n/a $ 11.25 $ n/a $ n/a
=========== =========== ======== ========= ============
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.26x
=========== =========== ======== ========= ============
Wtd. Avg. Units
Outstanding............ n/a n/a 70,000 n/a n/a
=========== =========== ======== ========= ============
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,401 n/a 1,844,144 45,341,545 (r)
=========== =========== ======== ========= ============
Shares Outstanding...... 6,150,000 43,498,464 n/a 1,844,144 45,342,608
=========== =========== ======== ========= ============
Calculation of Pro Forma
Distributions:
Pro Forma Cash from
Operations from
Statement of Cash
Flows.................. $(22,728,021)
Addback Pro Forma
Investments in Notes
Receivable............. 42,571,895
------------
Adjusted Pro Forma
Distributions Declared: $ 19,843,874 (s)
============
Pro Forma Wtd. Avg.
Dollars Outstanding.... $906,830,898 (t)
============
Pro Forma Cash
Distributions Declared
per $10,000 Investment. $ 219 (u)
============
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 21,919,865(a) $55,049,526 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $21,919,865 $64,106,902 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--Property. 4,042,290 2,889,368(a) 6,931,658 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 2,889,368 12,298,325 11,435,228 7,966,916 25,677,829
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties, Gain on
Securitization and
Provision for Losses on
Properties............. $32,778,080 $19,030,497 $51,808,577 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Gain on Securitization. 0 0 0 0 0 3,694,351
Other Expenses......... 0 0 0 0 0 0
Provision For Loss on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
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
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $19,030,497 $51,182,905 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per Share/Unit. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Units
Outstanding............ n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,568,389 34,216,608 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 34,757 37,372,684 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Calculation of Pro Forma
Distributions Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows.............
Addback Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable......
Addback Pro Forma
Investments in Notes
Receivable............
Adjusted Pro Forma
Distributions Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000 Investment.
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund VI, Ltd. Adjustments Pro Forma
------------ ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ 0 $55,049,526 $2,980,053 49,188 (j) $ 58,078,767
Fees................... (32,715,768)(b),(c) 3,226,263 0 (32,437)(k) 3,193,826
Interest and Other
Income................ 207,144 (d) 32,221,925 110,502 0 32,332,427
------------ ----------- ---------- --------- ------------
Total Revenue.......... $(32,508,624) $90,497,714 $3,090,555 $ 16,751 $ 93,605,020
Expenses:
General and
Administrative........ (4,241,719)(e) 15,939,556 205,612 (83,770)(l),(m) 16,061,398
Management and Advisory
Fees.................. (4,658,434)(f) 0 0 0 (n) 0
Fees to Related
Parties............... (2,161,897)(g) 858,787 0 0 858,787
Interest Expense....... 0 21,498,589 0 0 21,498,589
State Taxes............ 0 567,446 10,392 11,469 (o) 589,307
Depreciation--Other.... 0 199,157 0 0 199,157
Depreciation--Property. (340,898)(r) 6,590,760 456,958 232,310 (p) 7,280,028
Amortization........... 2,146,202 (h) 2,310,203 1,600 0 2,311,803
Transaction Costs...... 0 157,054 20,211 0 177,265
------------ ----------- ---------- --------- ------------
Total Expenses......... (9,256,746) 48,121,552 694,773 160,009 48,976,334
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties, Gain on
Securitization, and
Provision for Losses on
Properties ............ $(23,251,878) $42,376,162 $2,395,782 $(143,258) $ 44,628,686
Equity in Earnings of
Joint Venture/Minority
Interest.............. 0 (14,138) 279,977 (58,522)(q) 207,317
Gain on Sale of
Properties............ 0 0 345,122 0 345,122
Gain on Securitization. 0 3,694,351 0 0 3,694,351
Other Expenses......... 0 0 0 0 0
Provision For Loss on
Properties............ 0 (611,534) 0 0 (611,534)
------------ ----------- ---------- --------- ------------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... (23,251,878) 45,444,841 3,020,881 (201,780) 48,263,942
Benefit/(Provision) for
Federal Income Taxes.. 6,898,434 (i) 0 0 0 0
------------ ----------- ---------- --------- ------------
Net Earnings (Losses)... $(16,353,444) $45,444,841 $3,020,881 $(201,780) $ 48,263,942
============ =========== ========== ========= ============
Earnings Per Share/Unit. $ n/a $ n/a $ 43.16 $ n/a $ 1.14
============ =========== ========== ========= ============
Book Value Per
Share/Unit............. $ n/a $ n/a $ 408.50 $ n/a $ 16.44
============ =========== ========== ========= ============
Dividends Per
Share/Unit............. $ n/a $ n/a $ 46.00 $ n/a $ n/a
============ =========== ========== ========= ============
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.19x
============ =========== ========== ========= ============
Wtd. Avg. Units
Outstanding............ n/a n/a 70,000 n/a n/a
============ =========== ========== ========= ============
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,366,608 n/a 1,844,144 42,210,752 (s)
============ =========== ========== ========= ============
Shares Outstanding...... 6,150,000 43,522,684 n/a 1,844,144 45,366,828
============ =========== ========== ========= ============
Calculation of Pro Forma
Distributions Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows............. $ 58,755,083
Addback Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable...... (265,871,668)
Addback Pro Forma
Investments in Notes
Receivable............ 288,590,674
------------
Adjusted Pro Forma
Distributions Declared: $ 81,474,089 (t)
============
Pro Forma Wtd. Avg.
Dollars Outstanding.... $844,215,046 (u)
============
Pro Forma Cash
Distributions Declared
per $10,000 Investment. $ 965 (v)
============
</TABLE>
F-29
<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
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------ ------------ ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 10,490,297 $ 1,989,688 (a) $ 12,479,985 $ (195,278) $ (73,545) $ (129,428)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 1,548,813 349,465 (b) 1,898,278 39,581 0 0
Amortization expense... 7,368 0 7,368 0 26,238 424,697
Minority interest in
income of consolidated
joint venture......... 7,763 0 7,763 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 23,234 0 23,234 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 215,797 0 215,797 0 0 (73,166)
Gain on securitization. 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (82,660) 0 (82,660) (377,933) (242,251) (6,771)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (449,580)
Investment in notes
receivable............ 0 0 0 0 0 (42,571,895)
Collections on notes
receivable............ 0 0 0 0 0 6,417,907
Increase in restricted
cash.................. 0 0 0 0 0 (402,461)
Decrease in due from
related party......... 0 0 0 0 0 55,382
Decrease (increase) in
prepaid expenses...... 27,548 0 27,548 0 1,811 0
Decrease in net
investment in direct
financing leases...... 787,375 0 787,375 0 0 0
Increase in accrued
rental income......... (1,047,421) 0 (1,047,421) 0 0 0
Decrease (increase) in
intangibles and other
assets................ (30,554) 7,942
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 306,277 0 306,277 (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 0 71,853 25,550 0 0
Decrease in accrued
interest.............. 0 0 0 0 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 386,365 0 386,365 0 0 0
Increase (decrease) in
deferred rental
income................ 862,647 0 862,647 0 0 0
------------ ------------ ------------- ----------- --------- ------------
Total adjustments...... 3,114,959 349,465 3,464,424 (1,183,414) (344,708) (37,064,802)
------------ ------------ ------------- ----------- --------- ------------
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)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings, direct
financing leases, and
equipment.............. 0 0 0 0 0 0
Additions to land and
buildings on operating
leases................. (77,028,830) (58,749,637)(e) (135,778,467) (31,577) (10,092) 0
Investment in direct
financing leases....... (29,608,346) 0 (29,608,346) 0 0 0
Investment in joint
venture................ (117,662) 0 (117,662) 0 0 0
Aqcuisition of
businesses.............
Purchase of other
investments............ 0 0 0 0 0 0
Net loss in market value
from investments in
trading securities..... 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income...... 0 0 0 0 0 134,981
Investment in mortgage
notes receivable....... (1,388,463) 0 (1,388,463) 0 0 0
Collections on mortgage
note receivable........ 75,010 0 75,010 0 0 0
Investment in notes
receivable............. (1,087,483) 0 (1,087,483) 0 0 0
Collection on notes
receivable............. 239,596 0 239,596 0 0 0
Decrease in restricted
cash................... 0 0 0 0 0 0
Increase in intangibles
and other assets....... 0 0 0 0 0 0
Investment in
certificates of
deposit................ 0 0 0 0 0 0
Other................... 0 0 0 0 0 0
------------ ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) investing
activities............ (108,916,178) (58,749,637) (167,665,815) (31,577) (10,092) 134,981
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders...... 210,735 0 210,735 1,288,673 20,572 0
Contributions from
limited partners....... 0 0 0 0 0 0
Contributions from
holder of minority
interest............... 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity... (1,142,237) 0 (1,142,237) 0 0 0
Payment of stock
issuance costs......... (722,001) 0 (722,001) 0 0 0
Proceeds from borrowing
on line of credit/notes
payable................ 36,587,245 33,656,518 (e) 70,243,763 0 0 49,730,934
Payment on line of
credit/notes payable... (12,580,289) 0 (12,580,289) 0 (2,385) (10,291,473)
Retirement of shares of
common stock........... 0 0 0 0 0 0
Distributions to holders
of minority interest... (8,610) 0 (8,610) 0 0 0
Distributions to limited
partners............... 0 0 0 0 0 0
Distributions to
stockholders........... (14,237,405) 0 (14,237,405) 0 0 0
Other................... (200,234) 0 (200,234) 0 0 (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
Cash at beginning of
year................... 123,199,837 0 123,199,837 713,308 962,573 2,526,078
------------ ------------ ------------- ----------- --------- ------------
Cash at end of year..... $ 35,796,119 $(22,753,966) $ 13,042,153 $ 591,712 $ 552,415 4,896,688
============ ============ ============= =========== ========= ============
</TABLE>
F-30
<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>
Combining Historical
Pro Forma Combined CNL Income Proforma Adjusted
Adjustments APF Fund VI, Ltd. Adjustments Pro Forma
----------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(1,194,745)(a) $ 10,886,989 $ 656,386 $ (56,020)(a) $ 11,487,355
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 0 1,937,859 113,840 58,077 (b) 2,109,776
Amortization expense... 536,551 (c) 994,854 413 0 995,267
Minority interest in
income of consolidated
joint venture......... 0 7,763 2,500 0 10,263
Equity in earnings of
joint ventures, net of
distributions......... 0 23,234 71,838 14,631 (d) 109,703
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 0 142,631 0 0 142,631
Gain on securitization. 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (709,615) 87,902 0 (621,713)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (449,580) 0 0 (449,580)
Investment in notes
receivable............ 0 (42,571,895) 0 0 (42,571,895)
Collections on notes
receivable............ 0 6,417,907 0 0 6,417,907
Increase in restricted
cash.................. 0 (402,461) 0 0 (402,461)
Decrease in due from
related party......... 0 55,382 0 0 55,382
Decrease (increase) in
prepaid expenses...... 0 29,359 (7,473) 0 21,886
Decrease in net
investment in direct
financing leases...... 0 787,375 15,531 0 802,906
Increase in accrued
rental income......... 0 (1,047,421) (23,276) 0 (1,070,697)
Decrease (increase) in
intangibles and other
assets................ 0 (22,612) 0 0 (22,612)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (768,267) 33,144 0 (735,123)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 97,403 (9,755) 0 87,648
Decrease in accrued
interest.............. 0 (362,877) 0 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 0 386,365 19,201 0 405,566
Increase (decrease) in
deferred rental
income................ 0 862,647 0 0 862,647
----------- ------------- --------- ----------- -------------
Total adjustments...... 536,551 (34,591,949) 303,865 72,708 (34,215,376)
----------- ------------- --------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (658,194) (23,704,960) 960,251 16,688 (22,728,021)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings, direct
financing leases, and
equipment.............. 0 0 0 0 0
Additions to land and
buildings on operating
leases................. (135,820,136) 0 (135,820,136)
Investment in direct
financing leases....... 0 (29,608,346) 0 0 (29,608,346)
Investment in joint
venture................ 0 (117,662) (114,930) 0 (232,592)
Acquisition of
businesses............. (8,212,334)(f) (8,212,334) (2,490,666)(g) (11,124,000)
(421,000)(g)
Purchase of other
investments............ 0 0 0 0 0
Net loss in market value
from investments in
trading securities..... 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income...... 0 134,981 0 0 134,981
Investment in mortgage
notes receivable....... 0 (1,388,463) 0 0 (1,388,463)
Collections on mortgage
note receivable........ 0 75,010 0 0 75,010
Investment in notes
receivable............. 0 (1,087,483) 0 0 (1,087,483)
Collection on notes
receivable............. 0 239,596 0 0 239,596
Decrease in restricted
cash................... 0 0 0 0 0
Increase in intangibles
and other assets....... 0 0 0 0 0
Investment in
certificates of
deposit................ 0 0 0 0 0
Other................... 0 0 0 0 0
----------- ------------- --------- ----------- -------------
Net cash provided by
(used in) investing
activities............ (8,212,334) (175,784,837) (114,930) (2,911,666) (178,811,433)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders...... 0 1,519,980 0 0 1,519,980
Contributions from
limited partners....... 0 0 0 0 0
Contributions from
holder of minority
interest............... 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity... 0 (1,142,237) 0 0 (1,142,237)
Payment of stock
issuance costs......... 0 (722,001) 0 0 (722,001)
Proceeds from borrowing
on line of credit/notes
payable................ 0 119,974,697 0 0 119,974,697
Payment on line of
credit/notes payable... 0 (22,874,147) 0 0 (22,874,147)
Retirement of shares of
common stock........... 0 0 0 0 0
Distributions to holders
of minority interest... 0 (8,610) 0 0 (8,610)
Distributions to limited
partners............... 0 0 (857,500) 0 (857,500)
Distributions to
stockholders........... 0 (14,237,405) 0 0 (14,237,405)
Other................... 0 (209,836) 0 0 (209,836)
----------- ------------- --------- ----------- -------------
Net cash provided by
(used in) financing
activities............ 0 82,300,441 (857,500) 0 81,442,941
Net increase in cash.... (8,870,528) (117,189,356) (12,179) (2,894,978) (120,096,513)
Cash at beginning of
year................... 0 127,401,796 1,170,686 0 128,572,482
----------- ------------- --------- ----------- -------------
Cash at end of year..... (8,870,528) 10,212,440 1,158,507 (2,894,978) 8,475,969
=========== ============= ========= =========== =============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net income (loss)....... $ 32,152,408 $ 19,030,497 (a) $ 51,182,905 $10,656,379 $ (468,133) $ 427,134
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 4,042,290 2,889,368 (b) 6,931,658 119,923 79,234 0
Amortization expense... 11,808 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
leases................ 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 611,534 0 0 398,042
Gain on securitization. 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) (2,187,652) 0 0 0
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 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 693,372 0 0 0
------------- ------------ ------------- ----------- ---------- -------------
Total adjustments...... 6,963,867 2,889,368 9,853,235 (3,608,563) 316,963 1,610,591
------------- ------------ ------------- ----------- ---------- -------------
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
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings, direct
financing leases, and
equipment.............. 2,385,941 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................. (200,101,667)(A) (58,749,637)(e) (258,851,304) (381,671) (236,372) 0
Investment in direct
financing leases....... (47,115,435) (47,115,435) 0 0 0
Investment in joint
venture................ (974,696) (974,696) 0 0 0
Acquisition of
businesses.............
Purchase of other
investments............ (16,083,055) (16,083,055) 0 0 0
Net loss in market value
from investments in
trading securities..... 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income...... 0 0 0 0 212,821
Investment in mortgage
notes receivable....... (2,886,648) (2,886,648) 0 0 0
Collections on mortgage
note receivable........ 291,990 291,990 0 0 0
Investment in equipment
notes receivable....... (7,837,750) (7,837,750) 0 0 0
Collections on equipment
notes receivable....... 1,263,633 1,263,633 1,783,240 0 0
Decrease in restricted
cash................... 0 0 0 0 0
Increase in intangibles
and other assets....... (6,281,069) (6,281,069) 0 0 0
Other................... 0 0 200,000 0 0
------------- ------------ ------------- ----------- ---------- -------------
Net cash provided by
(used in) investing
activities............ (277,338,756) (58,749,637) (336,088,393) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders...... 385,523,966 385,523,966 966,115 51,830 50,100
Contributions from
limited partners....... 0 0 0 0 0
0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity... (4,574,925) (4,574,925) 0 0 0
Payment of stock
issuance costs......... (34,579,650) (34,579,650) 0 0 0
Proceeds from borrowing
on line of credit/notes
payable................ 7,692,040 33,656,518 (e) 41,348,558 198,296 0 413,555,624
Payment on line of
credit/notes payable... (8,039) (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock........... (639,528) (639,528) 0 0 0
Distributions to holders
of minority interest... (34,073) (34,073) 0 0 0
Distributions to limited
partners............... 0 0 0 0 0
Distributions to
stockholders........... (39,449,149) (39,449,149) (9,364,488) 0 0
Other................... (95,101) (95,101) 0 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
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
============= ============ ============= =========== ========== =============
</TABLE>
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund VI, Ltd. Adjustments Pro Forma
------------ ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net income (loss)....... $(16,353,444)(a) $ 45,444,841 $ 3,020,881 $ (201,780)(a) $ 48,263,942
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... (340,898)(b) 6,789,917 456,958 232,310 (b) 7,479,185
Amortization expense... 2,146,202 (c) 4,460,286 1,600 4,461,886
Minority interest in
income of consolidated
joint venture......... 30,156 43,128 73,284
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 5,616 58,522 (d) 48,698
Loss (gain) on sale of
land, building, net
investment in direct
leases................ 0 (345,122) (345,122)
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 1,009,576 0 1,009,576
Gain on securitization. (3,356,538) 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 265,871,668 0 265,871,668
Decrease (increase) in
other receivables..... (2,543,413) 21,503 (2,521,910)
Increase in accrued
interest income
included in notes
receivable............ (170,492) 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0
Investment in notes
receivable............ (288,590,674) 0 (288,590,674)
Collections on notes
receivable............ 23,539,641 0 23,539,641
Decrease in restricted
cash.................. 2,504,091 0 2,504,091
Decrease (increase) in
due from related
party................. (953,688) 0 (953,688)
Increase in prepaid
expenses.............. 7,246 3,286 10,532
Decrease in net
investment in direct
financing leases...... 1,971,634 63,868 2,035,502
Increase in accrued
rental income......... (2,187,652) 51,142 (2,136,510)
Increase in intangibles
and other assets...... (154,351) 0 (154,351)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 846,680 (37,246) 809,434
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. (133,364) (12,532) (145,896)
Increase in accrued
interest.............. (77,968) 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 (29,422) 407,421
Decrease in deferred
rental income......... 693,372 0 693,372
------------ ------------- ----------- ----------- -------------
Total adjustments...... 1,805,304 9,977,530 222,779 290,832 10,491,141
------------ ------------- ----------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (14,548,140) 55,422,371 3,243,660 89,052 58,755,083
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings, direct
financing leases, and
equipment.............. 2,385,941 2,832,253 5,218,194
Additions to land and
buildings on operating
leases................. (259,469,347) (125,000) (259,594,347)
Investment in direct
financing leases....... (47,115,435) 0 (47,115,435)
Investment in joint
venture................ (974,696) (3,896,682) (4,871,378)
Acquisition of
businesses............. (8,212,334)(f) (8,212,334) (2,490,666)(g) (11,124,000)
(421,000)(g)
Purchase of other
investments............ (16,083,055) 0 (16,083,055)
Net loss in market value
from investments in
trading securities..... 295,514 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income...... 212,821 0 212,821
Investment in mortgage
notes receivable....... (2,886,648) 0 (2,886,648)
Collections on mortgage
note receivable........ 291,990 0 291,990
Investment in equipment
notes receivable....... (7,837,750) 0 (7,837,750)
Collections on equipment
notes receivable....... 3,046,873 0 3,046,873
Decrease in restricted
cash................... 0 697,650 697,650
Increase in intangibles
and other assets....... (6,281,069) 0 (6,281,069)
0 0 0
Other................... 200,000 (3,300) 196,700
------------ ------------- ----------- ----------- -------------
Net cash provided by
(used in) investing
activities............ (8,212,334) (342,427,195) (495,079) (2,911,666) (345,833,940)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders...... 386,592,011 0 386,592,011
Contributions from
limited partners....... 0 0 0
0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity... (4,574,925) 0 (4,574,925)
Payment of stock
issuance costs......... (34,579,650) 0 (34,579,650)
Proceeds from borrowing
on line of credit/notes
payable................ 455,102,478 0 455,102,478
Payment on line of
credit/notes payable... (411,813,826) 0 (411,813,826)
Retirement of shares of
common stock........... (639,528) 0 (639,528)
Distributions to holders
of minority interest... (34,073) (42,654) (76,727)
Distributions to limited
partners............... 0 (3,150,000) (3,150,000)
Distributions to
stockholders........... (48,813,637) 0 (48,813,637)
Other................... (2,595,088) 0 (2,595,088)
------------ ------------- ----------- ----------- -------------
Net cash provided by
(used in) financing
activities............ 0 338,643,762 (3,192,654) 0 335,451,108
Net increase (decrease)
in cash................ (22,760,474) 51,638,938 (444,073) (2,822,614) 48,372,251
Cash at beginning of
year................... 49,829,130 1,614,759 51,443,889
------------ ------------- ----------- ----------- -------------
Cash at end of year..... $(22,760,474) $ 101,468,068 $ 1,170,686 $(2,822,614) $ 99,816,140
============ ============= =========== =========== =============
</TABLE>
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1.Basis of Presentation
The Pro Forma Balance Sheet as of 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 Income Fund. This unaudited pro forma financial
information has been prepared utilizing the historical financial statements of
APF and the historical combined financial information of the Advisor, CNL
Restaurant Financial Services Group and the Income Fund and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, the Advisor the CNL Restaurant Financial Services Group and the Income
Fund. The Pro Forma Balance Sheet was prepared as if the transactions described
above occurred on 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 Fund 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 Fund have
been eliminated in the pro forma financial statements.
3.Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
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-34
<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 Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Shares Offered.......... 3,800,000 2,350,000 1,844,143.85 7,994,143.85
Exchange Value.......... $ 20 $ 20 $ 20 $ 20
----------- ----------- ------------ ------------
Share Consideration..... $76,000,000 $47,000,000 $ 36,882,877 $159,882,877
Cash Consideration...... -- -- 421,000 421,000
APF Transaction Costs... 5,074,288 3,138,046 2,490,666 10,703,000
----------- ----------- ------------ ------------
Total Purchase
Price.............. $81,074,288 $50,138,046 $ 39,794,543 $171,006,877
=========== =========== ============ ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 7,141,252 $10,006,878 $ 28,464,016 $ 45,612,146
Purchase Price
Adjustments:
Land and buildings on
operating leases..... 8,509,246 8,509,246
Net investment in
direct financing
leases............... 2,171,115 2,171,115
Investment in joint
ventures............. 1,504,683 1,504,683
Accrued rental income. (809,258) (809,258)
Intangibles and other
assets............... (2,792,876) (45,259) (2,838,135)
Goodwill*............. 42,924,044 -- 42,924,044
Excess purchase price. 73,933,036 -- -- 73,933,036
----------- ----------- ------------ ------------
Total Allocation.... $81,074,288 $50,138,046 $ 39,794,543 $171,006,877
=========== =========== ============ ============
</TABLE>
- --------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $10,703,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of
the Advisor, CNL Financial Services Group and the Income Fund. The
excess purchase price paid for the Advisor to a related party of
$73,933,036 was expensed at March 31, 1999 because the Advisor has not
been deemed to qualify as a "business" for purposes of applying APB
Opinion No. 16, "Business Combinations". Goodwill of 42,924,044
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...................................... 73,933,036
Goodwill for CFC (Intangibles and other
assets)....................................... 42,924,044
CFC/CFS Org Costs/Other Assets................ 2,792,876
Cash to pay APF transaction costs............. 8,212,334
APF Common Stock.............................. 61,500
APF APIC...................................... 122,938,500
(To record acquisition of CFA, CFS and CFC)
2. Partners Capital............................ 28,464,016
Land and buildings on operating leases......... 8,509,246
Net investment in direct financing leases...... 2,171,115
Investment in joint ventures................... 1,504,683
Accrued rental income......................... 809,258
Intangibles and other assets.................. 45,259
Cash to pay APF Transaction costs............. 2,490,666
Cash consideration to Income Funds............ 421,000
APF Common Stock.............................. 18,441
APF APIC...................................... 36,864,436
(To record acquisition of Income Fund)
</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 Income Fund of $9,648 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, 1999.
(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.
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the
Income Fund:
<TABLE>
<S> <C>
Origination fees from affiliates.......... $ (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 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
</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>
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $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)
<TABLE>
<S> <C>
Amortization of goodwill...................... $536,551
</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 $12,297 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the
leases had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees.............................. $ 0
Reimbursement of administrative costs........ (13,437)
--------
$(13,437)
========
</TABLE>
(l) Represents the elimination of $13,437 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $11,998 in historical professional services
and administrative expenses (audit and legal fees, office
supplies, etc.) resulting from preparing quarterly and annual
financial and tax reports for one combined entity instead of
individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $7,607 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through May 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 Fund 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 $58,077 as a
result of adjusting the historical basis of the real estate wholly
owned by the Income Fund to fair value as a result of accounting
for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings is
being depreciated using the straight-line method over the
remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $14,631 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 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.
(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
Advisor, the CNL Restaurant Financial Services Group and the
Income Fund:
<TABLE>
<S> <C>
Origination fees from affiliates......... $ (1,773,406)
Secured equipment lease fees............. (54,998)
Advisory fees............................ (305,030)
Reimbursement of administrative costs.... (408,762)
Acquisition fees......................... (21,794,386)
Underwriting fees........................ (388,491)
Administrative, executive and guarantee
fees.................................... (1,233,043)
Servicing fees........................... (1,570,331)
Development fees......................... (229,153)
Management fees.......................... (1,851,004)
------------
Total.................................. $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services,
Inc. records all of the loan origination fees received as revenue.
For purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998
of $3,107,164 are being deferred for pro forma purposes and are
being amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the year
ended December 31, 1998, which were deferred for pro forma
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
purposes as described in 5(II)(c). These deferred loan origination
fees are being amortized and recorded as interest income over the
terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income............................... $207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs.......... $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees........................... $(1,851,004)
Administrative executive and guarantee
fees..................................... (1,233,043)
Servicing fees............................ (1,269,357)
Advisory fees............................. (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(g) Represents the elimination of $2,161,897 in fees between the
Advisor and the CNL Restaurant Financial Services Group resulting
from agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4)
<TABLE>
<S> <C>
Amortization of goodwill.................... $2,146,202
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $49,188 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees.............................. $ 0
Reimbursement of administrative costs........ (32,437)
--------
$(32,437)
========
</TABLE>
(l) Represents the elimination of $32,437 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $51,333 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
F-40
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(o) Represents additional state income taxes of $11,649 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 Fund had been issued as of January
1, 1998 and that these entities had operated under a REIT
structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $232,310 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Fund through joint venture or tenancy in common
arrangements with affiliates or unrelated third parties, to fair
value as a result by the Income Fund to fair value as a result of
accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $58,522 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF
and the Advisor which on a historical basis were capitalized as
part of the basis of the building.
(s) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a reverse stock split proposal and
a proposal to increase the number of authorized common shares of
APF on January 1, 1998.
(t) 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 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.
F-41
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Concluded)
(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 Income Fund and ii) to pay
the transaction costs allocated to the acquisition of the Income
Fund.
Non-Cash Investing Activites:
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B)
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the use of amounts borrowed under APF's credit facility
and the use of cash to 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 Income Fund and ii) to pay
the transaction costs allocated to the acquisition of the Income
Fund.
Non Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
F-42
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund VI, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund VI, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
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(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
A-2
<PAGE>
Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
A-3
<PAGE>
Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among by and among CNL American Properties Fund,
Inc., a Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware
limited partnership (the "Operating Partnership"), CNL APF GP corp., a
Delaware corporation (the "OP General Partner"), CNL Income Fund VI, Ltd., a
Florida limited partnership (the "Fund"), and Robert A. Bourne, James M.
Seneff, Jr., and CNL Realty Corporation, a Florida corporation (together with
Messrs. Borne and Seneff, the "General Partners"). APF, the Operating
Partnership, the OP General Partner, the Fund and the General Partners are
referred to collectively herein as the "Parties" and individually as a
"Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund
will be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. Amendments to Merger Agreement
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its
entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred
by the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote
against the Merger and affirmatively elect the note option, such limited
partners shall be entitled to receive, in lieu of the Share
Consideration, notes (the "Notes") in the aggregate amount equal to 97%
of the value (based on the Exchange Value as defined in the Registration
Statement) of the Share Consideration such Dissenting Partners would
have otherwise received had such partners not elected to receive the
Notes (the "Note Option"). The Notes will mature on the fifth
anniversary of the Closing Date and will bear interest at a fixed rate
equal to seven percent. The aggregate Share Consideration shall be
reduced on a one-for-basis for all APF Shares otherwise distributable to
Dissenting Partners had such Dissenting Partners not elected the Note
Option."
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<PAGE>
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to
Dissenting Limited Partners shall not have exceeded 15% of the value of
the Share Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. General
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will
constitute one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of
Florida or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Florida.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
-----------------------------------
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
-----------------------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
-----------------------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND VI, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
-----------------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
-----------------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
-----------------------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
-----------------------------------
James M. Seneff, Jr., as General
Partner
B-3
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund VI, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
B-4
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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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.
B-6
<PAGE>
"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 3,730,388 fully paid and nonassessable APF Common
Shares (1,865,194 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $34,043,807, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 57,269,612 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to execute and
deliver this Agreement and to perform their obligations hereunder. The
execution, delivery and
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performance by APF, the OP General Partner and the Operating Partnership of
this Agreement have been duly and validly authorized by the boards of directors
of APF and the OP General Partner. This Agreement constitutes the valid and
legally binding obligation of APF, the OP General Partner and the Operating
Partnership, enforceable in accordance with its terms and conditions. None of
APF, the OP General Partner or the Operating Partnership needs to give any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order to consummate the
transactions contemplated by this Agreement, except in connection with federal
securities laws and any applicable "Blue Sky" or state securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions the validity of this
Agreement or any action to be taken by APF in connection with the consummation
of the
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transactions contemplated hereby or could otherwise prevent or delay the
consummation of the transactions contemplated by this Agreement. Except as
publicly disclosed by APF in any APF SEC Document, none of APF or its
Subsidiaries is subject to any outstanding order, writ, injunction or decree
which, insofar as can be reasonably foreseen in the future, could reasonably be
expected to have a Material Adverse Effect on APF or would prevent or delay the
consummation of the transactions contemplated hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material
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terms of its permits, except where the failure so to comply could not
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF, the businesses of APF and its Subsidiaries are not,
to APF's Knowledge, being conducted in violation of any law, ordinance or
regulation of any governmental entity except that no representation or warranty
is made in this Section 6.14 with respect to environmental laws and except for
violations or possible violations which do not, and, insofar as reasonably can
be foreseen, in the future will not, have a Material Adverse Effect on APF.
Except as publicly disclosed by APF in its APF SEC Documents, no investigation
or review by any governmental entity with respect to APF or its Subsidiaries is
pending or, to the Knowledge of APF, threatened, nor, to the Knowledge of APF,
has any government entity indicated an intention to conduct the same, other
than, in each case, those which APF reasonably believes will not have a
Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 70,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such leases and subleases (as amended to date). With respect to
each lease and sublease listed in Section 7.12(b) of the Disclosure Schedule:
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(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General Partners have
made available to APF and the Operating Partnership correct and complete copies
of all such licenses, sublicenses, agreements, and permissions (as amended to
date).
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(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is
in good operating condition and repair (subject to normal wear and tear), and
is suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a
party:
(a) any agreement (or group of related agreements) for the lease of
personal property to or from any Person providing for lease payments in excess
of $25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates
(other than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any
of the General Partners or the corporate General Partner's directors,
officers, and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and
effect on identical terms following the consummation of the transactions
contemplated hereby (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (C) no party is in breach or
default, and no event has occurred which with notice or lapse of time would
constitute a breach or default, or permit termination, modification, or
acceleration, under the agreement; and (D) no party has repudiated any
provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of
the Fund are reflected properly on its books and records, are valid
receivables subject to no setoffs or counterclaims, and are current and
collectible in accordance with their terms at their recorded amounts, subject
only to the reserve for bad debts set forth on the face of the Most Recent
Balance Sheet (rather than in any notes thereto) as adjusted for the passage
of time through the Closing Date in accordance with the past custom and
practice of the Fund.
7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
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7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including policies
providing property, casualty, liability, and workers' compensation coverage and
bond and surety arrangements) to which the Fund has been a party, a named
insured, or otherwise the beneficiary of coverage at any time within the past
five years (or such lesser periods as the Fund has actively engaged in business
or owned any material assets): (i) the name, address, and telephone number of
the agent; (ii) the name of the insurer, the name of the policyholder, and the
name of each covered insured; and (iii) the policy number and the period of
coverage. With respect to each current insurance policy, to the Knowledge of
the General Partners and the Fund: (A) the policy is legal, valid, binding,
enforceable, and in full force and effect; (B) the policy will continue to be
legal, valid, binding, enforceable, and in full force and effect on identical
terms following the consummation of the transactions contemplated hereby; (C)
neither the Fund nor any other party to the policy is in breach or default
(including with respect to the payment of premiums or the giving of notices),
and no event has occurred which, with notice or the lapse of time, would
constitute such a breach or default, or permit termination, modification, or
acceleration, under the policy; and (D) no party to the policy has repudiated
any provision thereof. The Fund has been covered during the past five years (or
such lesser periods as the Fund has actively engaged in business or owned any
material assets) by insurance in scope and amount customary and reasonable for
the businesses in which it has engaged during the aforementioned period.
Section 7.18 of the Disclosure Schedule describes any self-insurance
arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the transactions
contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had any
liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do not
materially violate any such laws, ordinances, regulations or orders. The Fund
is not subject to any Liability or claim in connection with any environmental
law or any use, treatment, storage or disposal of any hazardous substance or
material or pollutant or any spill, leakage, discharge or release of any
hazardous substance or material or pollutant as a result of having owned or
operated any business prior to the Effective Time, which if a violation existed
would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $3,730,388 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of 373,039 in the aggregate (the "Threshold") nor
(ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
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 VI, 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
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CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND VII, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund VII, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly-owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999 and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties leased on a triple-
net basis, APF has the ability to offer a complete range of restaurant property
services to operators of national and regional restaurant chains, from triple-
net leasing and mortgage financing to site selection, construction management
and build-to-suit development. If APF acquires all of the Income Funds in the
Acquisition, APF expects to have total assets of approximately $1.5 billion at
the time of the consummation of the Acquisition and will be one of the largest
triple-net lease REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 1,601,186 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is uncertain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for trading on
the NYSE. We do not know the value at which an APF Share will trade on the NYSE
upon listing.
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It is possible that the APF Shares will trade at prices substantially below the
exchange value. APF has, however, recently sold $750 million of APF Shares
through three public offerings. In each offering, the offering price per APF
Share, after giving effect to the one-for-two stock split, equaled the exchange
value. The offering price was determined by APF based upon the estimated costs
of investing in restaurant properties and making mortgage loans, the fees to be
paid to CNL Fund Advisors, Inc. and its affiliates, as well as fees to third
parties and the expenses of the offering. At March 31, 1999, APF has invested
all of the net offering proceeds to acquire restaurant properties, to make
mortgage loans and to pay fees and other expenses.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the Acquisition?
There are a number of material risks and considerations that you should
consider, including:
. We are uncertain as to the value at which APF Shares will trade
following listing.
. We have material conflicts in light of our being both general partners
of the Income Funds and members of APF's Board of Directors.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. As stated below, the Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote against the
Acquisition.
Did you receive a fairness opinion in connection with APF's acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
with respect to the fairness, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the colored
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's acquisition of your
Income Fund. If you prefer, you may instead vote by telephone, following the
instructions on your consent form. If you sign and send in your consent form
and do not indicate how you want to vote, your consent form will be counted as
a vote "For" the Acquisition. If you do not vote or you abstain from voting, it
will count as a vote "Against" the Acquisition.
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In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2004. In an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only receive notes option if you vote "Against"
the Acquisition, and you elect to receive notes on your consent form. You will
receive APF Shares if your Income Fund elects to be acquired in the Acquisition
and you vote "For" the Acquisition, or you vote "Against" the Acquisition and
do not affirmatively select the notes option on your consent form. In addition,
if Limited Partners in your Income Fund elect to receive notes in an amount
greater than 15% of the estimated value of APF Shares to be paid to your Income
Fund, then APF has the right to decline to acquire your Income Fund. The notes
will not be listed on any exchange or automated quotation system, and a market
for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
the tax that you must pay will generally be based on the difference between the
value of the APF Shares you receive and the tax basis of your units. If you
elect to receive notes, your tax will be based upon your allocable share of the
gain which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Some of
the gain may be subject to the 25% rate of tax applicable to certain types of
real property gain.
We urge you to consult with your tax advisor to evaluate the taxes that will
be incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $2,300. To
review the tax consequences to the Limited Partners of the Income Funds in
greater detail, see pages 180 through 194 of the consent solicitation and
"Federal Income Tax Considerations" in this supplement.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds acquired by
APF may be differently constructed, located in a different geographic area or
of a different restaurant chain than the restaurant properties owned by your
Income Fund. Because the market for real estate may vary from one region of the
country to another, the change in geographic diversity may expose you to
different and greater risks than those to which you are presently exposed. For
geographic information regarding APF's and the Income Funds' restaurant
properties, see "APF's Business and The Restaurant Properties--Business
Objectives and Strategies" and "--The Restaurant Properties--General" and
"Business of the Income Funds--Description of Restaurant Properties" in the
consent solicitation.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund. This description is qualified in its entirety
by the more detailed discussion in the section entitled "Risk Factors"
contained in the consent solicitation.
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<PAGE>
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease below the exchange value upon listing.
Your Income Fund will be receiving 1,601,186 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices substantially below
the exchange value or the historical per share book value of the assets of APF.
The APF Shares have been approved for listing on the NYSE, subject to official
notice of issuance. Prior to listing, the existing APF stockholders have not
had an active trading market in which they could sell their APF Shares.
Additionally, any Limited Partners of the Income Funds who become APF
stockholders as a result of the Acquisition will have transformed their
investment in non-tradable units into an investment in freely tradable APF
Shares. Consequently, some of these stockholders may choose to sell their APF
Shares upon listing at a time when demand for APF Shares may be relatively low.
The market price of the APF Shares may be volatile after the Acquisition, and
the APF Shares could trade at prices substantially less than the exchange value
as a result of increased selling activity following the issuance of the APF
Shares, the interest level of investors in purchasing the APF Shares after the
Acquisition and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund made $900 in distributions, per $10,000 investment to you. While
historically, APF has made distributions equal to 7.625% per APF Share, based
on the exchange value, we cannot be sure that APF will be able to maintain this
level of distributions in the future. In the event that APF is unable to
maintain this level of distributions in the future, your distributions per
$10,000 investment may decrease substantially after the Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have three material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne have a different interest in the completion of the Acquisition which
may conflict with your interest as a Limited Partner of the Income Fund or with
their own positions as the general partners of your Income Fund. Second,
assuming only your Income Fund is acquired in the Acquisition, we will receive
15,956 APF Shares. Finally, in the event that your Income Fund is not acquired,
however, we, as the general partners of your Income Fund, may be required to
pay all or a substantial portion of the Acquisition costs allocated to your
Income Fund to the extent that you or other Limited Partners of your Income
Fund vote against the Acquisition. For additional information regarding the
Acquisition costs allocated to your Income Fund, see "Comparison of Alternative
Effect on Financial Condition and Results of Operations" contained in this
supplement.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own and lease on a triple-net basis, on the date that the Acquisition
is consummated, assuming only your Income Fund was acquired as of March 31,
1999, 553 restaurant properties. The risks inherent in investing in an
operating company such as APF include that
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APF may invest in new restaurant properties that are not as profitable as APF
anticipated, may incur substantial indebtedness to make future acquisitions of
restaurant properties which it may be unable to repay and may make mortgage
loans to prospective operators of national and regional restaurant chains which
may not have the ability to repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through sale of your APF Shares, not from
liquidation proceeds, if any, from restaurant properties. Continuation of your
Income Fund would, on the other hand, permit you eventually to receive
liquidation proceeds from the sale of the Income Fund's restaurant properties,
and your share of these sale proceeds could be higher than the amount realized
from the sale of your APF Shares or from the combination of cash paid to and
payments on any notes if you elect to receive the notes.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default 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. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
S-5
<PAGE>
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership. APF has funded and intends to continue to fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
March 31, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.62x and its ratio of debt-to-total assets was
28.02%. If only your Income Fund were acquired as of that date. APF's debt
service ratio would have been 3.75x and its ratio of debt to total assets would
have been 27.18%. Up through the time immediately prior to the consummation of
the Acquisition, as a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former Limited Partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgages. APF
typically does not require that a third party guarantee the obligations of the
tenant or the borrower. The ability of the tenants or borrowers to pay their
obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to: (1)
national, regional and local
S-6
<PAGE>
economic conditions which may be adversely affected by industry slowdowns,
employer relocations, prevailing employment conditions and other factors, and
which may reduce consumer demand for the products offered by APF's customers;
(2) local real estate conditions; (3) changes or weaknesses in specific
industry segments; (4) perceptions by prospective customers of the safety,
convenience, services and attractiveness of the restaurant chain; (5) changes
in demographics, consumer tastes and traffic patterns; (6) the ability to
obtain and retain capable management; (7) changes in laws, building codes,
similar ordinances and other legal requirements, including laws increasing the
potential liability for environmental conditions existing on properties; (8)
the inability of a particular restaurant chain's computer system, or that of
its franchisor or vendors, to adequately address Year 2000 issues; (9)
increases in operating expenses; and (10) increases in minimum wages, taxes,
including income, service, real estate and other taxes, or mandatory employee
benefits.
APF has tenants of two significant restaurant chains that have filed for
bankruptcy protection.
The fact that APF has tenants of two significant restaurant chains that have
filed for bankruptcy protection may adversely affect APF's total rental, earned
and interest income. Because all of APF's properties are leased on a triple-net
basis, if a tenant has defaulted on its lease obligations or has declared
bankruptcy, it would reduce APF's rental, earned and interest income until APF
could lease those affected properties to a new tenant or tenants. As of March
31, 1999, your Income Fund had no tenants under bankruptcy protection, and
therefore, assuming that your Income Fund is acquired by APF, you, as an APF
stockholder or noteholder, may be subject to the adverse consequences
associated with having tenants under bankruptcy protection.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as a stockholder, would be reduced substantially for
each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to certain adjustments that are unique to REITs, a REIT generally
must distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
For a more detailed discussion of the risks associated with the Acquisition,
see "Risk Factors" in the consent solicitation.
S-7
<PAGE>
CONSIDERATION PAID TO INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth information regarding the estimated value of
the consideration that your Income Fund will receive in the Acquisition. The
APF Shares payable to your Income Fund will not change if APF acquires fewer
than all of the Income Funds in the Acquisition. This data assumes that none of
the Limited Partners of your Income Fund have elected to receive notes. You
should note that the APF Shares may trade at prices substantially below the
exchange value upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited
Partner
Original Investments
Limited Less any
Partner Distributions Estimated Value
Investments of Net Sales Estimated of APF Shares
Less any Proceeds per Number of Value of Estimated Value per Average
Distributions $10,000 APF Shares APF Shares Estimated of APF Shares $10,000 Original
of Net Sales Original Offered to Payable to Acquisition after Acquisition Limited Partner
Proceeds(1) Investment(1) Income Fund Income Fund Expenses Expenses Investment
- ------------- ------------- ----------- ----------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$30,000,000 $10,000 1,601,186 $32,023,720 $390,000 $31,633,720 $10,439
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2004. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2004. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest. For more detailed information, see "The Acquisition" and
"Description of the Notes" in the consent solicitation.
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
S-8
<PAGE>
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees (1).................................................. $ 18,102
Appraisals and Valuation (2).................................... 6,600
Fairness Opinions (3)........................................... 30,000
Solicitation Fees (4)........................................... 17,237
Printing and Mailing (5)........................................ 112,541
Accounting and Other Fees (6)................................... 36,927
--------
Subtotal.................................................... 221,407
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(7)....................... 77,316
Legal Closing Fees(8)........................................... 38,190
Partnership Liquidation Costs(9)................................ 53,087
--------
Subtotal.................................................... 168,593
--------
Total........................................................... $390,000
========
</TABLE>
- --------
(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $312,063. Your Income
Fund's pro-rata portion of these fees was determined based on the
percentage of the value of the APF Share consideration payable to your
Income Fund, based on the exchange value, to the total value of the APF
Share consideration payable to all of the Income Funds, based on the
exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the Income
Funds in connection with the Acquisition were $105,420. Your Income Fund's
pro-rata portion of these fees was determined based on number of restaurant
properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and incurred a
fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $249,626. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $1,610,399. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
(6) Aggregate accounting and other fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $683,904. Your Income
Fund's pro-rata portion of these fees was determined based on the
percentage of your Income Fund's total assets as of March 31, 1999 to the
total assets of all of the Income Funds as of March 31, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by all of
the Income Funds in connection with the Acquisition is estimated to be
$1,312,808. Your Income Fund's pro-rata portion of these fees was
determined based on the percentage of the value of the APF Share
consideration payable to your Income Fund, based on the exchange value, to
the total value of the APF Share consideration payable to all of the Income
Funds, based on the exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,454. Your Income
Fund's pro-rata portion of these fees was determined based on the
percentage of your Income Fund's total assets as of March 31, 1999 to the
total assets of all of the Income Funds as of March 31, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of the Income
Funds in connection with the Acquisition is estimated to be $895,326. Your
Income Fund's pro-rata portion of these costs was determined based on the
percentage of the value of the APF Share consideration payable to your
Income Fund, based on the exchange value, to the total value of the APF
Share consideration payable to all of the Income Funds, based on the
exchange value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
other Limited Partners.
S-9
<PAGE>
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less that all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 80% or more in value of your Income Fund's
restaurant properties acquired within two years of the initial date of the
prospectus (January 30, 1990). Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding units.
Consequence of Failure to Approve the Acquisition
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition, the Acquisition may
not be consummated under the terms of the partnership agreement. In such event,
we plan to continue to operate your Income Fund as a going concern and to
eventually dispose of your Income Fund's restaurant properties approximately 7
to 12 years after they were acquired or as soon thereafter if, in our opinion,
market conditions permit, as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at
. We and members of APF's management
intend to solicit actively your support for the Acquisition and would like to
use the special meeting to answer questions about the Acquisition and the
solicitation materials and to explain in person our reasons for recommending
that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain their votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund of your Income
Fund must approve the Acquisition. Your Income Fund will be acquired by a
merger with the Operating Partnership, in the manner described in the consent
solicitation. A copy of the Agreement and Plan of Merger dated March 11, 1999,
as amended on June 4, 1999, by and between APF and your Income Fund is attached
hereto as Appendix B. We encourage you to read it.
S-10
<PAGE>
If you are not planning on attending the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about
, 1999 and will continue until the later of (a) , 1999, a
date not less than 60 calendar days from the initial delivery of the
solicitation materials, or (b) such later date as we may select and as to which
we give you notice. At our discretion, we may elect to extend the solicitation
period. Under no circumstances will the solicitation period be extended beyond
March 31, 2000. Any consent form received by Corporate Election Services prior
to 5:00 p.m., Eastern time, on the last day of the solicitation period will be
effective provided that such consent form has been properly completed and
signed. If you fail to return a signed consent form by the end of the
solicitation period, your units will be counted as voting "Against" the
Acquisition of your Income Fund and you will receive APF Shares if your Income
Fund is acquired. If you prefer, you may instead vote by telephone according to
the instructions on your consent form.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the quarter
ended March 31, 1999, the aggregate amounts accrued or paid by your Income Fund
to us are shown below under "Historical Distributions Paid to the General
Partners and Affiliates" and the estimated amounts of compensation that would
have been paid had the Acquisition been in effect for the periods presented,
are shown below under "Pro Forma Distributions to Be Paid to the General
Partners Following the Acquisition":
S-11
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, Quarter Ended
----------------------- March 31,
1996 1997 1998 1999
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the
General Partners and Affiliates:
General Partner Distributions........... -- -- -- --
Accounting and Administrative Services.. $92,985 $77,078 $87,256 $21,655
Broker/Dealer Commissions............... -- -- -- --
Due Diligence and Marketing Support
Fees................................... -- -- -- --
Acquisition Fees........................ -- -- -- --
Asset Management Fees .................. -- -- -- --
Real Estate Disposition Fees(1)......... -- -- -- --
------- ------- ------- -------
Total historical...................... $92,985 $77,078 $87,256 $21,655
Pro Forma Distribution to Be Paid to the
General Partners Following the
Acquisition:
Cash Distributions on APF Shares........ $ 6,815 $18,401 $30,827 $ 6,947
Salary Compensation..................... -- -- -- --
------- ------- ------- -------
Total pro forma....................... $ 6,815 $18,401 $30,827 $ 6,947
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to certain minimum
returns to the Limited Partners. To date, no such fees have been paid since
the required minimum returns have not been made to the Limited Partners.
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
contained herein under the caption "Financial Statements" and in the consent
solicitation under the caption "Summary--Our Reasons for Supporting the
Acquisition--Prices for Income Fund Units."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31, 1999
------------------------ --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income........ $826 $654 $768 $861 $814 $179 $132
Distributions from Return of
Capital......................... 94 246 132 39 86 46 95
---- ---- ---- ---- ---- ---- ----
Total............................ $920 $900 $900 $900 $900 $225 $227
==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from certain non-cash
items. This amount is not required to be presented as a return of capital
except for purposes of this table, and the Income Fund has not treated this
amount as a return of capital for any other purpose.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses during 1999. Thus, the pro forma information regarding
the distributions to APF stockholders for the quarter ended March 31, 1999 is
not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
S-12
<PAGE>
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the Acquisition
with those of several alternatives, the Acquisition is more economically
attractive to you and the other Limited Partners than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to certain closing conditions. Second, if your Income Fund is acquired
all Limited Partners of your Income Fund who vote against the Acquisition will
be given the option of receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others, that we will be relieved
from certain ongoing liabilities with respect to the Income Fund if it is
acquired by APF. For a further discussion of the conflicts of interest and
potential benefits of the Acquisition to us, see "Conflicts of Interest" below.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the values of the
consideration which would have been received by you and the other Limited
Partners in alternative transactions and concluded that the Acquisition is fair
based on such comparison. In addition, we believe the Acquisition is the best
way to maximize the return on your investment because of your ability to
participate in the potential appreciation of APF Shares. Since the investment
in your Income Fund is an investment in a static portfolio due to restrictions
contained in your Income Fund's partnership agreement and limited capital
resources, your investments have less of an opportunity to appreciate. Because
APF is a growth-oriented operating company, you will have the opportunity, as
an APF stockholder, to participate in APF's future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms
S-13
<PAGE>
underlying our belief as to fairness are partially based upon the appraisal of
your Income Fund's restaurant properties prepared by Valuation Associates and
upon the fairness opinion provided by Legg Mason. A copy of the fairness
opinion is attached hereto as Appendix A. We encourage you to read it. We
attributed significant weight to the appraisal of Valuation Associates and the
fairness opinions of Legg Mason, which we believe support our conclusion that
the Acquisition is fair to the Limited Partners. We do not know of any factors
that would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinions of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., an affiliate of CNL Group, Inc., and (3) Valuation
Associates has previously performed valuation appraisals for APF. See "Reports,
Opinions and Appraisals" in the consent solicitation.
On rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to, any other
aspect of the Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition or
the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Legg Mason's opinion also does not compare the relative merits of the
Acquisition with those of any other transaction or business strategy which were
or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares will exceed the going concern value and
liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Net Book Value of the Income Fund. We calculated the book value of your
Income Fund under generally accepted accounting principles, or GAAP, as of
March 31, 1999 per average $10,000 original investment. Since the calculation
of the book value was done on a GAAP basis, it is primarily based on
S-14
<PAGE>
historical cost and, therefore, it is not indicative of the true fair market
value of your Income Fund. This figure was compared to three other figures:
(1) the value of the Income Fund if it commenced an orderly liquidation
of its investment portfolio on December 31, 1998,
(2) the value of the Income Fund if it continued to operate in
accordance with its existing partnership agreement and business plans, and
(3) the estimated value of the APF Shares, based on the exchange value,
paid to each Income Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated Value
Original of APF Shares
Limited Partner per Average
Investments Less Going $10,000 Original
any Distributions GAAP Book Liquidation Concern Limited Partner
of Sales Proceeds(1) Value Value(2) Value(2) Investment
-------------------- --------- ----------- -------- ----------------
<S> <C> <C> <C> <C> <C>
CNL Income Fund VII,
Ltd.................... $10,000 $8,060 $9,753 $10,410 $10,439
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
(2) Liquidation and going concern values were based on appraisals prepared by
Valuation Associates. For a complete description of the methodologies
employed by Valuation Associates, see "Reports, Opinions and Appraisals" in
the consent solicitation.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have contractual
obligations pursuant to your Income Fund's partnership agreement as well as
state law to assess whether the terms of the Acquisition are fair and equitable
to the Limited Partners of your Income Fund without regard to whether the
Acquisition is fair and equitable to any of the other participants, including
the Limited Partners in other Income Funds. James M. Seneff, Jr. and Robert A.
Bourne act as the individual general partners of all of the Income Funds and
also as members of the Board of Directors of APF. While Messrs. Seneff and
Bourne have sought faithfully to discharge their obligations to your Income
Fund, there is an inherent conflict of interest in serving, directly or
indirectly, in a similar capacity with respect to your Income Fund and also on
APF's Board of Directors.
Lack of Independent Representation
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We have
been the parties responsible for structuring all the terms and conditions of
the Acquisition. Legal counsel engaged to assist with the preparation of the
S-15
<PAGE>
documentation for the Acquisition, including this consent solicitation, was
engaged by us and did not serve, or purport to serve, as legal counsel for the
Income Funds or Limited Partners. If an independent representative had been
retained for the Income Funds, the terms of the Acquisition may have been
different and possibly more favorable to the Limited Partners. In particular,
had separate representation for each of the Income Funds been arranged by us,
issues unique to the value of each of the specific Income Funds might have been
highlighted or received greater attention, resulting in adjustments to the
value assigned to the assets of such Income Funds and increasing the number of
APF Shares or notes that would be allocable to such Income Fund if acquired in
the Acquisition.
Substantial Benefits to General Partners
As a result of the Acquisition assuming only your Income Fund is acquired,
we are expected to receive three material benefits. These benefits include:
. With respect to our ownership in your Income Fund, we may be issued up to
15,956 APF Shares in accordance with the terms of your Income Fund's
partnership agreement. The 15,956 APF Shares issued to us will have an
estimated value, based on the exchange value, of approximately $319,120.
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr. Seneff
serving as Chairman of APF and Mr. Bourne serving as Vice Chairman.
Furthermore, they will be entitled to receive performance-based
incentives, including stock options under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of the Income Funds, we are legally liable for all of
Income Funds liabilities to the extent that the Income Funds are unable
to satisfy such liabilities. Because the partnership agreement for each
Income Fund prohibits the Income Funds from incurring indebtedness, the
only liabilities the Income Funds have are liabilities with respect to
their ongoing business operations. In the event that one or more Income
Funds are acquired by APF, we would be relieved of our legal obligation
to satisfy the liabilities of the acquired Income Fund or Income Funds.
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Certain Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund. If
your Income Fund is acquired by APF, and you have voted "For" the Acquisition,
you will receive APF Shares. If you have voted "Against" the Acquisition but
your Income Fund is acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
S-16
<PAGE>
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under certain circumstances, even
if APF were to make the same level of distributions as your Income Fund, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you. For certain other differences attributable to APF's status as a REIT,
see "--Taxation of APF" and "--Taxation of Stockholders--Taxable Domestic
Stockholders" in the consent solicitation.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF, the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain and loss based on the
exchange value, for an average $10,000 original Limited Partner investment in
your Income Fund, is set forth in the table below for those Limited Partners
subject to federal income taxation.
<TABLE>
<CAPTION>
Estimated Gain/
(Loss) per
Average $10,000
Original Limited
Partner Investment(1)
---------------------
<S> <C>
CNL Income Fund VII, Ltd.................................. $2,300
</TABLE>
- --------
(1) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be significantly below the exchange value.
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one more individuals or entities in exchange for the stock of that corporation,
and (2) immediately after the exchange, such individuals or entities are in
control of the corporation. For purposes of section 351(a), control is defined
as the ownership of stock possessing at least 80 percent of the total combined
voting power of all classes of stock entitled to vote and at least 80 percent
of the total number of shares of all other classes of stock of the corporation.
APF has represented to Shaw Pittman, APF's tax counsel, that, following the
Acquisition, the Limited Partners of the Income Funds will not own stock
possessing at least 80 percent of the total combined voting power of all
classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
S-17
<PAGE>
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if any,
assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2004, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," (which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses that
you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the notes may recognize gain in the year of the
Acquisition despite the fact that they will not receive cash with which to pay
the tax on the gain. Such Limited Partners will adjust the basis of the notes
as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes. See "-- Tax Consequences of Liquidation and
Termination of Your Income Fund" below.
S-18
<PAGE>
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares and/or notes, as the case may be, to you.
The taxable year of your Income Fund will end at this time, and you must
report, in your taxable year that includes the date of the Acquisition, your
share of all income, gain, loss, deduction and credit for your Income Fund
through the date of the Acquisition, including gain or loss resulting from the
Acquisition. If your taxable year is not the calendar year, you could be
required to recognize as income in a single taxable year your share of your
Income Fund's income attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units, and your holding period
for the notes for purposes of determining capital gain or loss from the
disposition of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17) or
(20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
For a discussion of the taxation of APF, see "Federal Income Tax
Considerations--Taxation of APF" in the consent solicitation.
S-19
<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 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 2,307,364 1,391,466 8,137 (2,450,663)(b),(c)
Interest and
Other Income..... 2,214,763 0 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 0 1,095,269 2,563,714 1,323,577 64,186 (377,734)(e)
Management and
Advisory Fees.... 697,364 0 697,364 0 0 611,196 (1,308,560)(f)
Fees to Related
Parties.......... 0 0 0 23,326 292,575 0 (292,786)(g)
Interest......... 0 0 0 50,730 0 4,769,268 0
State Taxes...... 235,208 0 235,208 0 0 0 0
Depreciation--
Other............ 0 0 0 39,581 26,238 0 0
Depreciation--
Property......... 1,548,813 349,465(a) 1,898,278 0 0 0 0
Amortization..... 7,368 0 7,368 0 0 0 537,887 (h)
Transaction
Costs............ 125,926 0 125,926 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
Total Expenses.. 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650 (1,441,193)
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) $ (947,402)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 0 17,271 0 0 0 0
Gain on Sale of
Properties....... 0 0 0 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 (215,797) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
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) (947,402)
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) $(1,196,081)
=========== ========== =========== ========== ========== ========== ===========
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund VII, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $14,523,161 $ 596,110 $ 18,932 (j) $15,138,203
Fees............. 1,256,304 0 (12,147)(k) 1,244,157
Interest and
Other Income..... 7,687,325 39,558 0 7,726,883
------------ ---------- ------------------ ------------
Total Revenue... $23,466,790 $635,668 $ 6,785 $24,109,243
Expenses:
General and
Administrative... 4,669,012 39,755 (21,329)(l),(m) 4,687,438
Management and
Advisory Fees.... 0 0 0 (n) 0
Fees to Related
Parties.......... 23,115 0 0 23,115
Interest......... 4,819,998 0 0 4,819,998
State Taxes...... 235,208 13,055 6,531 (o) 254,794
Depreciation--
Other............ 65,819 0 0 65,819
Depreciation--
Property......... 1,898,278 76,089 43,955 (p) 2,018,322
Amortization..... 545,255 0 0 545,255
Transaction
Costs............ 125,926 33,273 0 159,199
------------ ---------- ------------------ ------------
Total Expenses.. 12,382,611 162,172 29,157 12,573,940
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties, and
Provision for
Losses on
Properties....... $11,084,179 $ 473,496 $ (22,372) $11,535,303
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 68,646 (13,954)(q) 71,963
Gain on Sale of
Properties....... 0 273 0 273
Provision For
Loss on
Properties....... (215,797) 0 0 (215,797)
------------ ---------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 10,885,653 542,415 (36,326) 11,391,742
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ---------- ------------------ ------------
Net
Earnings(Losses).. $10,885,653 $ 542,415 $ (36,326) $11,391,742
============ ========== ================== ============
</TABLE>
S-20
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
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
============ =========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 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
============ =========== ============ ========== ========== ============ ===========
Weighted average
units
outstanding
during period... n/a n/a n/a n/a n/a n/a n/a
============ =========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,401 n/a 37,347,401 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 n/a 37,348,464 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... 14,237,405 n/a n/a n/a n/a n/a n/a
Cash
distributions
declared per
$10,000
Investment...... 191 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 -- $ 41,269,740 $ -- $ -- $247,896,287 $ --
Receivables,
net............. $ 548,862 -- $ 548,862 $7,141,967 $5,457,493 $ 1,969,339 $(148,629)(w)
Investment
in/due from
joint ventures.. $ 1,083,564 -- $ 1,083,564 $ -- $ -- $ -- --
Total assets.... $708,694,145 $33,656,518(u) $742,350,663 $8,223,820 $6,308,406 $264,700,433 $31,597,373 (v1),(w)
Total
liabilities/minority
interest........ $ 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 -- $657,085,021 $7,141,252 $5,440,307 $ 4,566,571 $32,017,743 (v1),(x)
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund VII, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- ------------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 542 40 n/a 559
============== =========== ==================== ==================
Earnings per
share/unit...... $ n/a $ 0.02 $ n/a $ 0.25
============== =========== ==================== ==================
Book value per
share/unit...... $ n/a $ 0.81 $ n/a $ 16.37
============== =========== ==================== ==================
Dividends per
share/unit...... $ n/a $ 0.02 $ n/a $ n/a
============== =========== ==================== ==================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 3.23x
============== =========== ==================== ==================
Weighted average
units
outstanding
during period... n/a 30,000,000 n/a n/a
============== =========== ==================== ==================
Weighted average
shares
outstanding
during period... 43,497,401 n/a 1,581,686 45,079,087 (r)
============== =========== ==================== ==================
Shares
outstanding..... 43,498,464 n/a 1,581,686 45,080,150
============== =========== ==================== ==================
Cash
distributions
declared:....... n/a 675,000 n/a $ 19,627,087 (s)
==================
Cash
distributions
declared per
$10,000
Investment...... n/a 225 n/a $ 217 (t)
==================
Balance sheet
data:
Real estate
assets, net..... $ 647,547,023 $18,345,784 $9,948,831 (v2) $ 675,841,638
Mortgages/notes
receivable...... $ 289,166,027 $ 1,238,427 -- $ 290,404,454
Receivables,
net............. $ 14,969,032 $ 4,628 $ (15,710)(y) $ 14,957,950
Investment
in/due from
joint ventures.. $ 1,083,564 $ 3,307,204 $1,401,623(v2) $ 5,792,391
Total assets.... $1,053,180,695 $25,111,407 $7,436,791 (v2),(y) $1,085,728,893
Total
liabilities/minority
interest........ $ 346,929,801 $ 930,196 $ (15,710)(y) $ 347,844,287
Total equity.... $ 706,250,894 $24,181,211 $7,452,501 (v2) $ 737,884,606
</TABLE>
S-21
<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 Advisor,
the CNL Restaurant Financial Services Group and the Income Fund:
<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 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
</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>
(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)
<TABLE>
<S> <C>
Amortization of goodwill........................................ $537,887
</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 $18,932 in accrued rental income resulting from the straight-
lining of scheduled rent increases throughout the lease terms for the
leases acquired from the Income Fund as if the leases had been acquired on
January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income Fund:
<TABLE>
<S> <C>
Management fees................................................ $ 0
Reimbursement of administrative costs.......................... (12,147)
--------
$(12,147)
========
</TABLE>
S-22
<PAGE>
(l) Represents the elimination of $12,147 in administrative costs reimbursed by
the Income Fund to the Advisor.
(m) Represents savings of $9,182 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income Fund to
the Advisor.
(o) Represents additional state income taxes of $6,531 resulting from assuming
that acquisitions of properties that had been operational when APF acquired
them from January 1, 1999 through May 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 Fund 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 $43,955 as a result of
adjusting the historical basis of the real estate wholly owned by the
Income Fund to fair value as a result of accounting for the Acquisition of
the Income Fund under the purchase accounting method. The adjustment to the
basis of the buildings is being depreciated using the straight-line method
over the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $13,954 as a
result of adjusting the historical basis of the real estate owned by the
Income Fund, indirectly through joint venture or tenancy in common
arrangements, to fair value as a result of accounting for the Acquisition
of the Income Fund under the purchase accounting method. The adjustment to
the basis of the buildings owned indirectly by the Income Fund is being
depreciated using the straight-line method over the remaining useful lives
of the properties.
(r) Common shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 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 Fund using the purchase
accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Shares Offered.......... 3,800,000 2,350,000 1,581,685.6 7,731,685.6
Exchange Value.......... $ 20 $ 20 $ 20 $ 20
----------- ----------- ----------- ------------
Share Consideration..... $76,000,000 $47,000,000 $31,633,712 $154,633,712
Cash Consideration...... -- -- 390,000 390,000
APF Transaction Costs... 5,247,120 3,244,929 2,210,951 10,703,000
----------- ----------- ----------- ------------
Total Purchase Price... $81,247,120 $50,244,929 $34,234,663 $165,726,712
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets - Historical. $ 7,141,252 $10,006,878 $24,181,211 $ 41,329,341
Purchase Price
Adjustments:
Land and buildings on
operating leases...... 7,926,422 7,926,422
Net investment in
direct financing
leases................ 2,022,409 2,022,409
Investment in joint
ventures.............. 1,401,623 1,401,623
Accrued rental income.. (1,226,001) (1,226,001)
Intangibles and other
assets................ (2,792,876) (71,001) (2,863,877)
Goodwill*.............. 43,030,927 -- 43,030,927
Excess purchase price.. 74,105,868 -- -- 74,105,868
----------- ----------- ----------- ------------
Total Allocation....... $81,247,120 $50,244,929 $34,234,663 $165,726,712
=========== =========== =========== ============
</TABLE>
--------
* Goodwill represents the portion of the purchase price which is
assumed to relate to the ongoing value of the debt business.
S-23
<PAGE>
The APF Transaction costs of $10,703,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $74,105,868 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 $43,030,927 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..... 74,105,868
Goodwill for
CFC
(Intangibles
and other
assets)...... 43,030,927
CFC/CFS Org
Costs/Other
Assets...... 2,792,876
Cash to pay
APF
transaction
costs....... 8,492,049
APF Common
Stock....... 61,500
APF APIC..... 122,938,500
(To record
acquisition
of CFA, CFS
and CFC)
2.Partners
Capital....... 24,181,211
Land and
buildings on
operating
leases....... 7,926,422
Net investment
in direct
financing
leases....... 2,022,409
Investment in
joint
ventures..... 1,401,623
Accrued
rental
income...... 1,226,001
Intangibles
and other
assets...... 71,001
Cash to pay
APF
Transaction
costs....... 2,210,951
Cash
consideration
to Income
Funds....... 390,000
APF Common
Stock....... 15,817
APF APIC..... 31,617,895
(To record
acquisition
of the
Income Fund)
</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 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.
(y) Represents the elimination by the Income Fund of $15,710 in related party
payables recorded as receivables by the Advisor.
S-24
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND VII, LTD.
The following table sets forth certain financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
VII, Ltd." in this supplement.
<TABLE>
<CAPTION>
Quarter Ended
March 31, Year Ended December 31,
----------------------- ----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ---------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 704,314 $ 723,782 $2,948,217 $ 2,919,734 $ 2,882,709 $ 2,716,883 $ 2,917,331
Net income (2).......... 542,415 606,859 2,466,018 2,606,008 2,326,863 1,982,148 2,503,300
Cash distributions
declared............... 675,000 675,000 2,700,000 2,700,000 2,700,000 2,700,002 2,760,002
Net income per unit (2). 0.018 0.020 0.081 0.086 0.077 0.065 0.083
Cash distributions
declared per unit...... 0.023 0.023 0.090 0.090 0.090 0.090 0.092
GAAP book value per
unit................... 0.806 0.816 0.810 0.818 0.821 0.834 0.858
Weighted average number
of Limited Partner
units outstanding...... 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000
<CAPTION>
March 31, December 31,
----------------------- ----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ---------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $25,111,407 $25,423,834 25,218,258 $25,479,762 $25,523,853 $25,915,616 $26,644,363
Total partners' capital. 24,181,211 24,479,637 24,313,796 24,547,778 24,641,770 25,014,907 25,732,761
</TABLE>
- --------
(1) Revenues include equity in earnings of unconsolidated joint ventures and
minority interest in income of the consolidated joint venture.
(2) Net income for the quarters ended March 31, 1999 and 1998, and for the
years ended December 31, 1998, 1997, 1996, 1995 and 1994, includes $273,
$247, $1,025, $184,627, $195,675, $1,421 and $77,379, respectively, from
gains on dispositions of land and buildings. Net income for the years ended
December 31, 1997, 1996 and 1995, includes a loss on sale of land and
building of $19,739, $235,465 and $6,556, respectively. In addition, net
income for the year ended December 31, 1995, includes a loss on demolition
of building of $174,466.
(3) Distributions for the year ended December 31, 1994, include a special
distribution to the Limited Partners of $60,000 which represented
cumulative excess operating reserves.
S-25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND VII, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
August 18, 1989, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurants, as well as land
upon which restaurants were to be constructed, which are leased primarily to
operators of national and regional fast-food and family-style restaurant
chains. The leases are triple-net leases, with the lessees generally
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of 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
S-26
<PAGE>
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
S-27
<PAGE>
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.
S-28
<PAGE>
During 1998, 1997, and 1996, certain of our affiliates incurred on behalf of
the Income Fund $86,851, $74,968, and $97,288, respectively, for certain
operating expenses. As of December 31, 1998 and 1997, the Income Fund owed
$17,911 and $27,683, respectively, to affiliates for such amounts and
accounting and administrative services. As of March 11, 1999, the Income Fund
had reimbursed the affiliates all such amounts. In addition, as of December 31,
1998 and 1997, the Income Fund owed $7,200 in real estate disposition fees to
an affiliate as a result of its services in connection with the 1995 sale of
the restaurant property in Jacksonville, Florida. The payment of such fees is
deferred until the Limited Partners have received the sum of their 10%
preferred return and their adjusted capital contributions. Total liabilities,
including distributions payable, of the Income Fund decreased to $732,746 at
December 31, 1998, from $749,587 at December 31, 1997 primarily as a result of
a decrease in rents paid in advance at December 31, 1998. 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.
S-29
<PAGE>
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
S-30
<PAGE>
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
S-31
<PAGE>
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
S-32
<PAGE>
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.
S-33
<PAGE>
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>
S-34
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998....... F-1
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998..................................................................... F-2
Condensed Statements of Partner's Capital for the Quarter Ended March 31,
1999 and for the Year Ended December 31, 1998............................ F-3
Condensed Statements of Cash Flows for the Quarter Ended March 31, 1999
and 1998................................................................. F-4
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998............................................................ F-5
Report of Independent Accountants......................................... F-7
Balance Sheets as of December 31, 1998 and 1997........................... F-8
Statements of Income for the Years Ended December 31, 1998, 1997 and 1996. F-9
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996............................................................ F-10
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................. F-12
Unaudited Pro Forma Financial Information................................. F-21
Unaudited Pro Forma Balance Sheet as of March 31, 1999.................... F-22
Unaudited Pro Forma Statement of Earnings for the Quarter Ended March 31,
1999..................................................................... F-24
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998..................................................................... F-26
Unaudited Pro Forma Statement of Cash Flows for the Quarter Ended March
31, 1999................................................................. F-28
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................. F-30
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-32
</TABLE>
<PAGE>
CNL INCOME FUND 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-1
<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-2
<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-3
<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-4
<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-5
<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 , 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-6
<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-7
<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-8
<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-9
<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-10
<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-11
<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-12
<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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
the Partnership's share of total rental and earned income from the
unconsolidated joint ventures and the two properties held as tenants-in-common
with affiliates) for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants.... $732,650 $625,724 $608,852
Burger King.................................... 469,984 466,626 478,901
Hardees........................................ 451,348 447,074 524,625
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
11. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 3,202,371 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $31,543,529 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
12. Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 11 being adjusted to 1,601,186 shares valued at $20.00 per
APF share.
F-20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of the Advisor
and the CNL Restaurant Financial Services Group, and the acquisition of the
Income Fund (the acquisition of the Income Fund is referred to as the
"Acquisition"), and is based on estimates and assumptions set forth below in
the notes to such information which included pro forma adjustments. This
unaudited pro forma financial information has been prepared utilizing the
historical financial statements of APF, the historical combined financial
information of the Income Fund, the Advisor and CNL Restaurant Financial
Services Group (shown separately as CFS and CFC) and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, Income Fund, Advisor and CNL Restaurant Financial Services Group. The
pro forma balance sheet assumes that the Acquisition occurred on 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.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of March 31, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL
Historical Pro Forma Historical Financial
APF Adjustments Subtotal Advisor Services, Inc.
------------ ------------ ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... 475,787,661 58,749,637 (A) 534,537,298 0 0
Net Investment in Direct
Financing Leases....... 123,270,117 0 123,270,117 0 0
Mortgages and Notes
Receivable............. 41,269,740 0 41,269,740 0 0
Other Investments....... 16,199,792 0 16,199,792 0 0
Investment In Joint
Ventures............... 1,083,564 0 1,083,564 0 0
Cash and Cash
Equivalents............ 35,796,119 (25,093,119)(A) 10,703,000 591,712 552,415
Restricted
Cash/Certificates of
Deposit................ 2,007,278 0 2,007,278 0 0
Receivables (net
allowances)/
Due from Related Party.. 548,862 0 548,862 7,141,967 5,457,493
Accrued Rental Income... 5,007,334 0 5,007,334 0 0
Other Assets............ 7,723,678 0 7,723,678 490,141 298,498
Goodwill................ 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Assets........... $708,694,145 $33,656,518 $742,350,663 $8,223,820 $6,308,406
============ =========== ============ ========== ==========
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 3,464,190 $ 0 $ 3,464,190 $ 576,531 $ 304,375
Accrued Construction
Costs Payable.......... 10,172,169 0 10,172,169 0 0
Distributions Payable... 0 0 0 119,808 0
Due to Related Parties.. 148,629 0 148,629 0 563,724
Income Tax Payable...... 0 0 0 0 0
Line of Credit/Notes
payable................ 34,150,000 33,656,518 (A) 67,806,518 386,229 0
Deferred Income......... 2,052,530 0 2,052,530 0 0
Rents Paid in Advance... 1,340,636 0 1,340,636 0 0
Minority Interest....... 280,970 0 280,970 0 0
Common Stock............ 373,483 0 373,483 0 0
Common Stock--Class A... 0 0 0 6,400 2,000
Common Stock--Class B... 0 0 0 3,600 724
Additional Paid-in-
capital................ 670,005,177 0 670,005,177 4,617,047 5,303,503
Accumulated
distributions in excess
of net earnings........ (13,293,639) 0 (13,293,639) 2,514,205 134,080
Partners Capital........ 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Liabilities and
Equity................ $708,694,145 $33,656,518 $742,350,663 $8,223,820 $6,308,406
============ =========== ============ ========== ==========
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of March 31, 1999
<TABLE>
<CAPTION>
Historical Historical
CNL Combining CNL Income
Financial Pro Forma Combined Fund VII, Pro Forma Adjusted
Corp. Adjustments APF Ltd. Adjustments Pro Forma
------------ ------------ -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... 0 0 534,537,298 15,002,418 7,926,422 (B2) 557,466,138
Net Investment in Direct
Financing Leases....... 0 0 123,270,117 3,343,366 2,022,409 (B2) 128,635,892
Mortgages and Notes
Receivable............. 247,896,287 0 289,166,027 1,238,427 0 290,404,454
Other Investments....... 6,353,482 0 22,553,274 0 0 22,553,274
Investment In Joint
Ventures............... 0 0 1,083,564 3,307,204 1,401,623 (B2) 5,792,391
Cash and Cash
Equivalents............ 4,896,688 (8,492,049)(B1) 8,251,766 918,362 (2,210,951)(B2) 6,569,177
(390,000)(B2)
Restricted
Cash/Certificates
of Deposit............. 853,243 0 2,860,521 -- 0 2,860,521
Receivables (net
allowances)/ Due from
Related Party.......... 1,969,339 (148,629)(C) 14,969,032 4,628 (15,710)(E) 14,957,950
Accrued Rental Income... 0 0 5,007,334 1,226,001 (1,226,001)(B2) 5,007,334
Other Assets............ 2,731,394 (2,792,876)(B1) 8,450,835 71,001 (71,001)(B2) 8,450,835
Goodwill................ 0 43,030,927 (B1) 43,030,927 0 0 43,030,927
------------ ------------ -------------- ----------- ----------- --------------
Total Assets........... $264,700,433 $ 31,597,373 $1,053,180,695 $25,111,407 $ 7,436,791 $1,085,728,893
============ ============ ============== =========== =========== ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 1,613,959 $ 0 $ 5,959,055 $ 39,937 $ 0 $ 5,998,992
Accrued Construction
Costs Payable.......... 0 0 10,172,169 0 0 10,172,169
Distributions Payable... 0 0 119,808 675,000 0 794,808
Due to Related Parties.. 31,310,681 (148,629)(C) 31,874,405 15,710 (15,710)(E) 31,874,405
Income Tax Payable...... 271,741 (271,741)(D) 0 0 0 0
Line of Credit/Notes
payable................ 226,937,481 0 295,130,228 0 0 295,130,228
Deferred Income......... 0 0 2,052,530 0 0 2,052,530
Rents Paid in Advance... 0 0 1,340,636 53,205 0 1,393,841
Minority Interest....... 0 0 280,970 146,344 0 427,314
Common Stock............ 0 61,500 (B1) 434,483 0 15,817 (B2) 450,800
Common Stock--Class A... 200 (8,600)(B1) 0 0 0 0
Common Stock--Class B... 501 (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 3,937,095 122,938,500 (B1) 792,943,677 0 31,617,895 (B2) 824,561,572
(13,857,645)(B1)
Accumulated
distributions in excess
of net earnings........ 628,775 (3,277,060)(B1) (87,127,766) 0 0 (87,127,766)
(74,105,868)(B1)
271,741 (D)
Partners Capital........ 0 0 0 24,181,211 (24,181,211)(B2) 0
------------ ------------ -------------- ----------- ----------- --------------
Total Liabilities and
Equity................ $264,700,433 $ 31,597,373 $1,053,180,695 $25,111,407 $ 7,436,791 $1,085,728,893
============ ============ ============== =========== =========== ==============
</TABLE>
F-23
<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
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $12,184,008 $2,339,153(a) $14,523,161 $ 0 $ 0 $ 0
Fees................... 0 0 0 2,307,364 1,391,466 8,137
Interest and Other
Income................ 2,214,763 0 2,214,763 47,213 129,362 5,233,919
----------- ---------- ----------- ---------- ---------- ----------
Total Revenue.......... $14,398,771 $2,339,153 $16,737,924 $2,354,577 $1,520,828 $5,242,056
Expenses:
General and
Administrative
Expenses.............. 1,095,269 0 1,095,269 2,563,714 1,323,577 64,186
Management and Advisory
Fees.................. 697,364 0 697,364 0 0 611,196
Fees Paid to Related
Parties............... 0 0 0 23,326 292,575 0
Interest Expense....... 0 0 0 50,730 0 4,769,268
State Taxes............ 235,208 0 235,208 0 0 0
Depreciation--Other.... 0 0 0 39,581 26,238 0
Depreciation--
Property.............. 1,548,813 349,465(a) 1,898,278 0 0 0
Amortization........... 7,368 0 7,368 0 0 0
Transaction Costs...... 125,926 0 125,926 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
Total Expenses......... 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, 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)
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 17,271 0 17,271 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Provision For Loss on
Properties............ (215,797) 0 (215,797) 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
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)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 127,496 48,017 73,166
----------- ---------- ----------- ---------- ---------- ----------
Net Earnings (Losses)... $10,490,297 $1,989,688 $12,479,985 $ (195,278) $ (73,545) $ (129,428)
=========== ========== =========== ========== ========== ==========
Earnings Per
Share/Unit............. $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ==========
Book Value Per
Share/Unit............. $ 17.59 $ 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
=========== ========== =========== ========== ========== ==========
Ratio of Earnings to
Fixed Charges.......... 50.03x n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========== ==========
Wtd. Avg. Units
Outstanding............ 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
=========== ========== =========== ========== ========== ==========
Shares Outstanding...... 37,348,464 n/a 37,348,464 n/a n/a n/a
=========== ========== =========== ========== ========== ==========
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 Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Combining Historical CNL
Pro Forma Combined Income Fund Pro Forma Adjusted
Adjustments APF VII, Ltd. Adjustments Pro Forma
----------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $14,523,161 $ 596,110 $ 18,932 (j) $ 15,138,203
Fees................... (2,450,663)(b),(c) 1,256,304 0 (12,147)(k) 1,244,157
Interest and Other
Income................ 62,068 (d) 7,687,325 39,558 0 7,726,883
----------- ----------- ---------- --------- ------------
Total Revenue.......... $(2,388,595) $23,466,790 $ 635,668 $ 6,785 $ 24,109,243
Expenses:
General and
Administrative
Expenses.............. (377,734)(e) 4,669,012 39,755 (21,329)(l),(m) 4,687,438
Management and Advisory
Fees.................. (1,308,560)(f) 0 0 0 (n) 0
Fees Paid to Related
Parties............... (292,786)(g) 23,115 0 0 23,115
Interest Expense....... 0 4,819,998 0 0 4,819,998
State Taxes............ 0 235,208 13,055 6,531 (o) 254,794
Depreciation--Other.... 0 65,819 0 0 65,819
Depreciation--
Property.............. 0 1,898,278 76,089 43,955 (p) 2,018,322
Amortization........... 537,887 (h) 545,255 0 0 545,255
Transaction Costs...... 0 125,926 33,273 0 159,199
----------- ----------- ---------- --------- ------------
Total Expenses......... (1,441,193) 12,382,611 162,172 29,157 12,573,940
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties and
Provision for Losses on
Properties............. $ (947,402) $11,084,179 $ 473,496 $ (22,372) $ 11,535,303
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 0 17,271 68,646 (13,954)(q) 71,963
Gain on Sale of
Properties............ 0 0 273 0 273
Provision For Loss on
Properties............ 0 (215,797) 0 0 (215,797)
----------- ----------- ---------- --------- ------------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (947,402) 10,885,653 542,415 (36,326) 11,391,742
Benefit/(Provision) for
Federal Income Taxes.. (248,679)(i) 0 0 0 0
----------- ----------- ---------- --------- ------------
Net Earnings (Losses)... $(1,196,081) $10,885,653 $ 542,415 $ (36,326) $ 11,391,742
=========== =========== ========== ========= ============
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.02 $ n/a $ 0.25
=========== =========== ========== ========= ============
Book Value Per
Share/Unit............. $ n/a $ n/a $ 0.81 $ n/a $ 16.37
=========== =========== ========== ========= ============
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.02 $ n/a $ n/a
=========== =========== ========== ========= ============
Ratio of Earnings to
Fixed Charges ......... n/a n/a n/a n/a 3.23x
=========== =========== ========== ========= ============
Wtd. Avg. Units
Outstanding............ n/a n/a 30,000,000 n/a n/a
=========== =========== ========== ========= ============
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,401 n/a 1,581,686 45,079,087(r)
=========== =========== ========== ========= ============
Shares Outstanding...... 6,150,000 43,498,464 n/a 1,581,686 45,080,150
=========== =========== ========== ========= ============
Calculation of Pro Forma
Distributions:
Pro Forma Cash from
Operations from
Statement of Cash
Flows................. $(22,944,808)
Addback Pro Forma
Investments in Notes
Receivable............ 42,571,895
------------
Adjusted Pro Forma
Distributions Declared: $ 19,627,087(s)
============
Pro Forma Wtd. Avg.
Dollars Outstanding.... $901,581,732(t)
============
Pro Forma Cash
Distributions Declared
per $10,000
Investment............. $ 217(u)
============
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 21,919,865(a) $55,049,526 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $21,919,865 $64,106,902 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 2,889,368(a) 6,931,658 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 2,889,368 12,298,325 11,435,228 7,966,916 25,677,829
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties,
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)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Other Expenses......... 0 0 0 0 0 0
Provision For Loss on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
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
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $19,030,497 $51,182,905 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Units
Outstanding............ n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,566,916 34,215,135 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 34,757 37,372,684 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Calculation of Pro Forma
Distributions Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows.............
Addback Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable......
Addback Pro Forma
Investments in Notes
Receivable............
Adjusted Pro Forma
Distributions Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical CNL
Pro Forma Combined Income Fund Pro Forma Adjusted
Adjustments APF VII, Ltd. Adjustments Pro Forma
------------ ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $55,049,526 $2,484,463 $ 75,726 (j) $ 57,609,715
Fees................... (32,715,768)(b),(c) 3,226,263 0 (27,875)(k) 3,198,388
Interest and Other
Income................ 207,144 (d) 32,221,925 171,263 0 32,393,188
------------ ----------- ---------- --------- ------------
Total Revenue.......... $(32,508,624) $90,497,714 $2,655,726 $ 47,851 $ 93,201,291
Expenses:
General and
Administrative........ (4,241,719)(e) 15,939,556 157,358 (70,909)(l),(m) 16,026,005
Management and Advisory
Fees.................. (4,658,434)(f) 0 0 0 (n) 0
Fees to Related
Parties............... (2,161,897)(g) 858,787 0 0 858,787
Interest Expense....... 0 21,498,589 0 0 21,498,589
State Taxes............ 0 567,446 2,729 9,845 (o) 580,020
Depreciation--Other.... 0 199,157 0 0 199,157
Depreciation--
Property.............. (340,898)(r) 6,590,760 304,356 175,820 (p) 7,070,936
Amortization........... 2,151,546 (h) 2,315,547 0 0 2,315,547
Transaction Costs...... 0 157,054 18,781 0 175,835
------------ ----------- ---------- --------- ------------
Total Expenses......... (9,251,402) 48,126,896 483,224 114,756 48,724,876
Operating
Earnings(Losses) Before
Equity in Earnings of
Joint Ventures/Minority
Interests, Gain on Sale
of Properties,
Provision for Losses on
Properties and Other
Expenses............... $(23,257,222) $42,370,818 $2,172,502 $(66,905) $ 44,476,415
Equity in Earnings of
Joint Venture/Minority
Interest.............. 0 (14,138) 292,491 (55,817)(q) 222,536
Gain on Sale of
Properties............ 0 0 1,025 0 1,025
Gain on
Securitization........ 0 3,694,351 0 0 3,694,351
Other Expenses......... 0 0 0 0 0
Provision For Loss on
Properties............ 0 (611,534) 0 0 (611,534)
------------ ----------- ---------- --------- ------------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (23,257,222) 45,439,497 2,466,018 (122,722) 47,782,793
Benefit/(Provision) for
Federal Income Taxes.. 6,898,434 (i) 0 0 0 0
------------ ----------- ---------- --------- ------------
Net Earnings (Losses)... $(16,358,788) $45,439,497 $2,466,018 $(122,722) $ 47,782,793
============ =========== ========== ========= ============
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.08 $ n/a $ 1.14
============ =========== ========== ========= ============
Book Value Per
Share/Unit............. $ n/a $ n/a $ 0.81 $ n/a $ 16.41
============ =========== ========== ========= ============
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.09 $ n/a $ n/a
============ =========== ========== ========= ============
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.17x
============ =========== ========== ========= ============
Wtd. Avg. Units
Outstanding............ n/a n/a 30,000,000 n/a n/a
============ =========== ========== ========= ============
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,365,135 n/a 1,581,686 41,946,821 (s)
============ =========== ========== ========= ============
Shares Outstanding...... 6,150,000 43,522,684 n/a 1,581,686 45,104,370
============ =========== ========== ========= ============
Calculation of Pro Forma
Distributions Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows............. $ 58,322,261
Addback Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable...... (265,871,668)
Addback Pro Forma
Investments in Notes
Receivable............ 288,590,674
------------
Adjusted Pro Forma
Distributions Declared: $ 81,041,267 (t)
============
Pro Forma Wtd. Avg.
Dollars Outstanding.... $838,936,408 (u)
============
Pro Forma Cash
Distributions Declared
per $10,000
Investment............. $ 966 (v)
============
</TABLE>
F-27
<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 Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 10,490,297 $ 1,989,688 (a) $ 12,479,985 $ (195,278) $ (73,545) $ (129,428)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 1,548,813 349,465 (b) 1,898,278 39,581 0 0
Amortization expense... 7,368 0 7,368 0 26,238 424,697
Minority interest in
income of consolidated
joint venture......... 7,763 0 7,763 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 23,234 0 23,234 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 215,797 0 215,797 0 0 (73,166)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (82,660) 0 (82,660) (377,933) (242,251) (6,771)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (449,580)
Investment in notes
receivable............ 0 0 0 0 0 (42,571,895)
Collections on notes
receivable............ 0 0 0 0 0 6,417,907
Increase in restricted
cash.................. 0 0 0 0 0 (402,461)
Decrease in due from
related party......... 0 0 0 0 0 55,382
Decrease (increase) in
prepaid expenses...... 27,548 0 27,548 0 1,811 0
Decrease in net
investment in direct
financing leases...... 787,375 0 787,375 0 0 0
Increase in accrued
rental income......... (1,047,421) 0 (1,047,421) 0 0 0
Decrease (increase) in
intangibles and other
assets................ (30,554) 7,942
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 306,277 0 306,277 (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 0 71,853 25,550 0 0
Decrease in accrued
interest.............. 0 0 0 0 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 386,365 0 386,365 0 0 0
Increase (decrease) in
deferred rental
income................ 862,647 0 862,647 0 0 0
------------- ------------ ------------- ----------- --------- -----------
Total adjustments...... 3,114,959 349,465 3,464,424 (1,183,414) (344,708) (37,064,802)
------------- ------------ ------------- ----------- --------- -----------
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)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 0 0 0 0
Additions to land and
buildings on operating
leases................ (77,028,830) (58,749,637)(e) (135,778,467) (31,577) (10,092) 0
Investment in direct
financing leases...... (29,608,346) 0 (29,608,346) 0 0 0
Investment in joint
venture............... (117,662) 0 (117,662) 0 0 0
Acquisition of
businesses............
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 134,981
Investment in mortgage
notes receivable...... (1,388,463) 0 (1,388,463) 0 0 0
Collections on mortgage
note receivable....... 75,010 0 75,010 0 0 0
Investment in notes
receivable............ (1,087,483) 0 (1,087,483) 0 0 0
Collection on notes
receivable............ 239,596 0 239,596 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... 0 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------ ------------- ----------- --------- -----------
Net cash provided by
(used in) investing
activities............ (108,916,178) (58,749,637) (167,665,815) (31,577) (10,092) 134,981
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,735 0 210,735 1,288,673 20,572 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,142,237) 0 (1,142,237) 0 0 0
Payment of stock
issuance costs........ (722,001) 0 (722,001) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 36,587,245 33,656,518 (e) 70,243,763 0 0 49,730,934
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (2,385) (10,291,473)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (8,610) 0 (8,610) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0 0
Distributions to
stockholders.......... (14,237,405) 0 (14,237,405) 0 0 0
Other.................. (200,234) 0 (200,234) 0 0 (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
Cash at beginning of
year................... 123,199,837 0 123,199,837 713,308 962,573 2,526,078
------------- ------------ ------------- ----------- --------- -----------
Cash at end of year..... $ 35,796,119 $(22,753,966) $ 13,042,153 $ 591,712 $ 552,415 $ 4,896,688
============= ============ ============= =========== ========= ===========
</TABLE>
F-28
<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>
Combining Historical CNL
Pro Forma Income Fund Pro Forma Adjusted
Adjustments Combined APF VII, Ltd. Adjustments Pro Forma
----------- ------------ -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(1,196,081)(a) $ 10,885,653 $542,415 $ (36,326)(a) $ 11,391,742
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 0 1,937,859 76,089 43,955 (b) 2,057,903
Amortization expense... 537,887 (c) 996,190 0 0 996,190
Minority interest in
income of consolidated
joint venture......... 0 7,763 4,649 0 12,412
Equity in earnings of
joint ventures, net of
distributions......... 0 23,234 20,730 13,954 (d) 57,918
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 (273) 0 (273)
Provision for loss on
land, buildings, and
direct financing
leases................ 0 142,631 0 0 142,631
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (709,615) 73,874 0 (635,741)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (449,580) 0 0 (449,580)
Investment in notes
receivable............ 0 (42,571,895) 0 0 (42,571,895)
Collections on notes
receivable............ 0 6,417,907 0 0 6,417,907
Increase in restricted
cash.................. 0 (402,461) 0 0 (402,461)
Decrease in due from
related party......... 0 55,382 0 0 55,382
Decrease (increase) in
prepaid expenses...... 0 29,359 (6,463) 0 22,896
Decrease in net
investment in direct
financing leases...... 0 787,375 22,026 0 809,401
Increase in accrued
rental income......... 0 (1,047,421) (20,473) 0 (1,067,894)
Decrease (increase) in
intangibles and other
assets................ 0 (22,612) 0 0 (22,612)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (768,267) 31,218 0 (737,049)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 97,403 (9,401) 0 88,002
Decrease in accrued
interest.............. 0 (362,877) 0 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 0 386,365 4,178 0 390,543
Increase (decrease) in
deferred rental
income................ 0 862,647 0 0 862,647
----------- ------------ -------- ---------- ------------
Total adjustments...... 537,887 (34,590,613) 196,154 57,909 (34,336,550)
----------- ------------ -------- ---------- ------------
Net cash provided by
(used in) operating
activities............ (658,194) (23,704,960) 738,569 21,583 (22,944,808)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 0 0 0
Additions to land and
buildings on operating
leases................ (135,820,136) 0 (135,820,136)
Investment in direct
financing leases...... 0 (29,608,346) 0 0 (29,608,346)
Investment in joint
venture............... 0 (117,662) 0 0 (117,662)
Acquisition of
businesses............ (8,492,049)(f) (8,492,049) (2,210,951)(g) (11,093,000)
(390,000)(g)
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment
income................ 0 134,981 0 0 134,981
Investment in mortgage
notes receivable...... 0 (1,388,463) 0 0 (1,388,463)
Collections on mortgage
note receivable....... 0 75,010 2,878 0 77,888
Investment in notes
receivable............ 0 (1,087,483) 0 0 (1,087,483)
Collection on notes
receivable............ 0 239,596 0 0 239,596
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 0 0 0
----------- ------------ -------- ---------- ------------
Net cash provided by
(used in) investing
activities............ (8,492,049) (176,064,552) 2,878 (2,600,951) (178,662,625)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 1,519,980 0 0 1,519,980
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,142,237) 0 0 (1,142,237)
Payment of stock
issuance costs........ 0 (722,001) 0 0 (722,001)
Proceeds from borrowing
on line of
credit/notes payable.. 0 119,974,697 0 0 119,974,697
Payment on line of
credit/notes payable.. 0 (22,874,147) 0 0 (22,874,147)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (8,610) (4,910) 0 (13,520)
Distributions to
limited partners...... 0 0 (675,000) 0 (675,000)
Distributions to
stockholders.......... 0 (14,237,405) 0 0 (14,237,405)
Other.................. 0 (209,836) 0 0 (209,836)
----------- ------------ -------- ---------- ------------
Net cash provided by
(used in) financing
activities............ 0 82,300,441 (679,910) 0 81,620,531
Net increase in cash.... (9,150,243) (117,469,071) 61,537 (2,579,368) (119,986,902)
Cash at beginning of
year................... 0 127,401,796 856,825 0 128,258,621
----------- ------------ -------- ---------- ------------
Cash at end of year..... (9,150,243) 9,932,725 918,362 (2,579,368) 8,271,719
=========== ============ ======== ========== ============
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Restated Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------ ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 32,152,408 $ 19,030,497 (a) $ 51,182,905 $10,656,379 $ (468,133) $ 427,134
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 4,042,290 2,889,368 (b) 6,931,658 119,923 79,234 0
Amortization expense... 11,808 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
leases................ 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) (2,187,652) 0 0 0
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 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 693,372 0 0 0
------------- ------------ ------------ ----------- ---------- -------------
Total adjustments...... 6,963,867 2,889,368 9,853,235 (3,608,563) 316,963 1,610,591
------------- ------------ ------------ ----------- ---------- -------------
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
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (58,749,637)(e) (258,851,304) (381,671) (236,372) 0
Investment in direct
financing leases...... (47,115,435) (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) (974,696) 0 0 0
Acquisition of
businesses............
Purchase of other
investments........... (16,083,055) (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) (6,281,069) 0 0 0
0 0 0 0 0
Other.................. 0 0 200,000 0 0
------------- ------------ ------------ ----------- ---------- -------------
Net cash provided by
(used in) investing
activities............ (277,338,756) (58,749,637) (336,088,393) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0
0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 33,656,518 (e) 41,348,558 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) (34,073) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0
Distributions to
stockholders.......... (39,449,149) (39,449,149) (9,364,488) 0 0
Other.................. (95,101) (95,101) 0 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
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
============= ============ ============ =========== ========== =============
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical CNL
Pro Forma Combined Income Pro Forma Adjusted
Adjustments APF Fund VII, Ltd Adjustments Pro Forma
------------ ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(16,358,788)(a) $ 45,439,497 $ 2,466,018 $ (122,722)(a) $ 47,782,793
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... (340,898)(b) 6,789,917 304,356 175,820(b) 7,270,093
Amortization expense... 2,151,546 (c) 4,465,630 0 4,465,630
Minority interest in
income of consolidated
joint venture......... 30,156 18,590 48,746
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 65,476 55,817 (d) 105,853
Loss(gain) on sale of
land, building, net
investment in direct
leases................ 0 (1,025) (1,025)
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 1,009,576 0 1,009,576
Gain on
securitization........ (3,356,538) 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 265,871,668 0 265,871,668
Decrease(increase) in
other receivables..... (2,543,413) (27,330) (2,570,743)
Increase in accrued
interest income
included in notes
receivable............ (170,492) 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0
Investment in notes
receivable............ (288,590,674) 0 (288,590,674)
Collections on notes
receivable............ 23,539,641 0 23,539,641
Decrease in restricted
cash.................. 2,504,091 0 2,504,091
Decrease(increase) in
due from related
party................. (953,688) 0 (953,688)
Increase in prepaid
expenses.............. 7,246 639 7,885
Decrease in net
investment in direct
financing leases...... 1,971,634 81,760 2,053,394
Increase in accrued
rental income......... (2,187,652) (90,896) (2,278,548)
Increase in intangibles
and other assets...... (154,351) 0 (154,351)
Increase(decrease) in
accounts payable,
accrued expenses and
other
liabilities........... 846,680 (5,197) 841,483
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. (133,364) (9,772) (143,136)
Increase in accrued
interest.............. (77,968) 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 (11,644) 425,199
Decrease in deferred
rental income......... 693,372 0 693,372
------------ ------------- ----------- ----------- -------------
Total adjustments...... 1,810,648 9,982,874 324,957 231,637 10,539,468
------------ ------------- ----------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (14,548,140) 55,422,371 2,790,975 108,915 58,322,261
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 0 2,385,941
Additions to land and
buildings on operating
leases................ (259,469,347) 0 (259,469,347)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435)
Investment in joint
venture............... (974,696) 0 (974,696)
Acquisition of
businesses............ (8,492,049)(f) (8,492,049) (2,210,951)(g) (11,093,000)
(390,000)(g)
Purchase of other
investments........... (16,083,055) 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 295,514 0 295,514
Proceeds from retained
interest and
securities, excluding
investment
income................ 212,821 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648)
Collections on mortgage
note receivable....... 291,990 10,811 302,801
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750)
Collections on
equipment notes
receivable............ 3,046,873 0 3,046,873
Decrease in restricted
cash.................. 0 0 0
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069)
0 0 0
Other.................. 200,000 13,221 213,221
------------ ------------- ----------- ----------- -------------
Net cash provided by
(used in) investing
activities............ (8,492,049) (342,706,910) 24,032 (2,600,951) (345,283,829)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 386,592,011 0 386,592,011
Contributions from
limited partners...... 0 0 0
0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925)
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 455,102,478 0 455,102,478
Payment on line of
credit/notes payable.. (411,813,826) 0 (411,813,826)
Retirement of shares of
common stock.......... (639,528) 0 (639,528)
Distributions to
holders of minority
interest.............. (34,073) (19,499) (53,572)
Distributions to
limited partners...... 0 (2,700,000) (2,700,000)
Distributions to
stockholders.......... (48,813,637) 0 (48,813,637)
Other.................. (2,595,088) 0 (2,595,088)
------------ ------------- ----------- ----------- -------------
Net cash provided by
(used in) financing
activities............ 0 338,643,762 (2,719,499) 0 335,924,263
Net increase (decrease)
in cash................ (23,040,189) 51,359,223 95,508 (2,492,036) 48,962,695
Cash at beginning of
year................... 49,829,130 761,317 50,590,447
------------ ------------- ----------- ----------- -------------
Cash at end of year..... $(23,040,189) $ 101,188,353 $ 856,825 $(2,492,036) $ 99,553,142
============ ============= =========== =========== =============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of 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 Income Fund. This unaudited pro forma financial
information has been prepared utilizing the historical financial statements of
APF and the historical combined financial information of the Advisor, CNL
Restaurant Financial Services Group and the Income Fund and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, the Advisor the CNL Restaurant Financial Services Group and the Income
Fund. The Pro Forma Balance Sheet was prepared as if the transactions described
above occurred on 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 Fund 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 Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
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-32
<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 Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Shares Offered.......... 3,800,000 2,350,000 1,581,685.6 7,731,685.6
Exchange Value.......... $ 20 $ 20 $ 20 $ 20
----------- ----------- ----------- ------------
Share Consideration..... $76,000,000 $47,000,000 $31,633,712 $154,633,712
Cash Consideration...... -- -- 390,000 390,000
APF Transaction Costs... 5,247,120 3,244,929 2,210,951 10,703,000
----------- ----------- ----------- ------------
Total Purchase
Price.............. $81,247,120 $50,244,929 $34,234,663 $165,726,712
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 7,141,252 $10,006,878 $24,181,211 $ 41,329,341
Purchase Price
Adjustments:
Land and buildings on
operating leases..... 7,926,422 7,926,422
Net investment in
direct
financing leases..... 2,022,409 2,022,409
Investment in joint
ventures............. 1,401,623 1,401,623
Accrued rental income. (1,226,001) (1,226,001)
Intangibles and other
assets............... (2,792,876) (71,001) (2,863,877)
Goodwill*............. 43,030,927 -- 43,030,927
Excess purchase price. 74,105,868 -- -- 74,105,868
----------- ----------- ----------- ------------
Total Allocation.... $81,247,120 $50,244,929 $34,234,663 $165,726,712
=========== =========== =========== ============
</TABLE>
- --------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $10,703,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of
the Advisor, CNL Financial Services Group and the Income Fund. The
excess purchase price paid for the Advisor to a related party of
$74,105,868 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 $43,030,927
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 earn-
ings....................................... 74,105,868
Goodwill for CFC (Intangibles and other as-
sets)...................................... 43,030,927
CFC/CFS Org Costs/Other Assets............ 2,792,876
Cash to pay APF transaction costs......... 8,492,049
APF Common Stock.......................... 61,500
APF APIC.................................. 122,938,500
(To record acquisition of CFA, CFS and CFC)
2. Partners Capital........................... 24,181,211
Land and buildings on operating leases...... 7,926,422
Net investment in direct financing leases... 2,022,409
Investment in joint ventures................ 1,401,623
Accrued rental income..................... 1,226,001
Intangibles and other assets.............. 71,001
Cash to pay APF Transaction costs......... 2,210,951
Cash consideration to Income Funds........ 390,000
APF Common Stock.......................... 15,817
APF APIC.................................. 31,617,895
(To record acquisition of Income Fund)
</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 Income Fund of $15,710 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, 1999.
(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.
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................... $ (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 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
</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>
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $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)
<TABLE>
<S> <C>
Amortization of goodwill....................................... $537,887
</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 $18,932 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................... $ 0
Reimbursement of administrative costs......................... (12,147)
--------
$(12,147)
========
</TABLE>
(l) Represents the elimination of $12,147 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $9,182 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $6,531 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through May 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 Fund 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 $43,955 as a
result of adjusting the historical basis of the real estate wholly
owned by the Income Fund to fair value as a result of accounting
for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings is
being depreciated using the straight-line method over the remaining
useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $13,954 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
under the purchase accounting method. The adjustment to the basis of
the buildings owned indirectly by the Income Fund is being
depreciated using the straight-line method over the remaining useful
lives of the properties.
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 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-37
<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
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates.......................... $ (1,773,406)
Secured equipment lease fees.............................. (54,998)
Advisory fees............................................. (305,030)
Reimbursement of administrative costs..................... (408,762)
Acquisition fees.......................................... (21,794,386)
Underwriting fees......................................... (388,491)
Administrative, executive and guarantee fees.............. (1,233,043)
Servicing fees............................................ (1,570,331)
Development fees.......................................... (229,153)
Management fees........................................... (1,851,004)
------------
Total................................................... $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the year ended
December 31, 1998, which were deferred for pro forma purposes as
described in 5(II)(c). These deferred loan origination fees are
being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
<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..................................... $2,151,546
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $75,726 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................... $ 0
Reimbursement of administrative costs......................... (27,875)
--------
$(27,875)
========
</TABLE>
(l) Represents the elimination of $27,875 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $43,034 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $9,845 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1998 through 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 Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(p) Represents an increase in depreciation expense of $175,820 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Fund through joint venture or tenancy in common
arrangements with affiliates or unrelated third parties, to fair
value as a result by the Income Fund to fair value as a result of
accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $55,817 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF
and the Advisor which on a historical basis were capitalized as
part of the basis of the building.
(s) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a reverse stock split proposal and a
proposal to increase the number of authorized common shares of APF
on January 1, 1998.
(t) 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 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.
F-40
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
6. Adjustments to Pro Forma Statement of Cash Flows
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the 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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
F-41
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
Non-Cash Investing Activities
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the use of amounts borrowed under APF's credit facility
and the use of cash to 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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non-Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
F-42
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund VII, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund VII, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
A-1
<PAGE>
(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
A-2
<PAGE>
Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
A-3
<PAGE>
Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among CNL American Properties Fund, Inc., a
Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware limited
partnership (the "Operating Partnership"), CNL APF GP corp., a Delaware
corporation (the "OP General Partner"), CNL Income Fund VII, Ltd. a Florida
limited partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr.,
and CNL Realty Corporation, a Florida corporation (together with Messrs. Bourne
and Seneff, the "General Partners"). APF, the Operating Partnership, the OP
General Partner, the Fund and the General Partners are referred to collectively
herein as the "Parties" and individually as a "Party."
Recitals:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund will
be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
Agreement:
1. AMENDMENTS TO MERGER AGREEMENT
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its
entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote
against the Merger and affirmatively elect the note option, such
limited partners shall be entitled to receive, in lieu of the Share
Consideration, notes (the "Notes") in the aggregate amount equal to 97%
of the value (based on the Exchange Value as defined in the
Registration Statement) of the Share Consideration such Dissenting
Partners would have otherwise received had such partners not elected to
receive the Notes (the "Note Option"). The Notes will mature on the
fifth anniversary of the Closing Date and will bear interest at a fixed
rate equal to seven percent. The aggregate Share Consideration shall be
reduced on a one-for-basis for all APF Shares otherwise distributable
to Dissenting Partners had such Dissenting Partners not elected the
Note Option."
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
B-1
<PAGE>
1.6 The following subsection shall be added to Section 10.2:
"(g) The aggregate face amount of the Notes to be issued to Dissenting
Limited Partners shall not have exceeded 15% of the value of the Share
Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. GENERAL
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will
constitute one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of
Florida or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Florida.
B-2
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
By: /s/ James M. Seneff, Jr.
Its: Chairman and 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 VII, 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
B-3
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund VII, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
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"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 3,202,371 fully paid and nonassessable APF Common
Shares (1,601,186 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $29,261,140, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 57,797,629 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to execute and
deliver this Agreement and to perform their obligations hereunder. The
execution, delivery and
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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) 30,000,000 units of limited partnership interests. All of
the outstanding Fund Interests have been duly authorized, are validly issued,
fully paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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<PAGE>
(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
B-17
<PAGE>
from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such leases and subleases (as amended to date). With respect to
each lease and sublease listed in Section 7.12(b) of the Disclosure Schedule:
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(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General Partners have
made available to APF and the Operating Partnership correct and complete copies
of all such licenses, sublicenses, agreements, and permissions (as amended to
date).
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<PAGE>
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is
in good operating condition and repair (subject to normal wear and tear), and
is suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a
party:
(a) any agreement (or group of related agreements) for the lease of
personal property to or from any Person providing for lease payments in excess
of $25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates
(other than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any
of the General Partners or the corporate General Partner's directors,
officers, and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and
effect on identical terms following the consummation of the transactions
contemplated hereby (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (C) no party is in breach or
default, and no event has occurred which with notice or lapse of time would
constitute a breach or default, or permit termination, modification, or
acceleration, under the agreement; and (D) no party has repudiated any
provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of
the Fund are reflected properly on its books and records, are valid
receivables subject to no setoffs or counterclaims, and are current and
collectible in accordance with their terms at their recorded amounts, subject
only to the reserve for bad debts set forth on the face of the Most Recent
Balance Sheet (rather than in any notes thereto) as adjusted for the passage
of time through the Closing Date in accordance with the past custom and
practice of the Fund.
7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
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7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including policies
providing property, casualty, liability, and workers' compensation coverage and
bond and surety arrangements) to which the Fund has been a party, a named
insured, or otherwise the beneficiary of coverage at any time within the past
five years (or such lesser periods as the Fund has actively engaged in business
or owned any material assets): (i) the name, address, and telephone number of
the agent; (ii) the name of the insurer, the name of the policyholder, and the
name of each covered insured; and (iii) the policy number and the period of
coverage. With respect to each current insurance policy, to the Knowledge of
the General Partners and the Fund: (A) the policy is legal, valid, binding,
enforceable, and in full force and effect; (B) the policy will continue to be
legal, valid, binding, enforceable, and in full force and effect on identical
terms following the consummation of the transactions contemplated hereby; (C)
neither the Fund nor any other party to the policy is in breach or default
(including with respect to the payment of premiums or the giving of notices),
and no event has occurred which, with notice or the lapse of time, would
constitute such a breach or default, or permit termination, modification, or
acceleration, under the policy; and (D) no party to the policy has repudiated
any provision thereof. The Fund has been covered during the past five years (or
such lesser periods as the Fund has actively engaged in business or owned any
material assets) by insurance in scope and amount customary and reasonable for
the businesses in which it has engaged during the aforementioned period.
Section 7.18 of the Disclosure Schedule describes any self-insurance
arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the transactions
contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had any
liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do not
materially violate any such laws, ordinances, regulations or orders. The Fund
is not subject to any Liability or claim in connection with any environmental
law or any use, treatment, storage or disposal of any hazardous substance or
material or pollutant or any spill, leakage, discharge or release of any
hazardous substance or material or pollutant as a result of having owned or
operated any business prior to the Effective Time, which if a violation existed
would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $3,202,371 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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<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 $320,237 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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<PAGE>
14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
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 VII, 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
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<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND VIII, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund VIII, Ltd., which we refer to as the Income Fund, for the purpose
of enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly-owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999, and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his representative upon written request to D.F. King
& Co., 77 Water Street, New York, New York 10005.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties on a triple-net
basis, APF has the ability to offer a complete range of restaurant property
services to operators of national and regional restaurant chains, from triple-
net leasing and mortgage financing to site selection, construction management
and build-to-suit development. If APF acquires all of the Income Funds in the
Acquisition, APF expects to have total assets of approximately $1.5 billion at
the time of the consummation of the Acquisition and will be one of the largest
triple-net lease REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 2,021,318 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is uncertain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for trading on
the NYSE. We do not know the value at which an APF Share will trade on the NYSE
upon listing. It is possible that the APF Shares will trade at prices
substantially below the exchange value. APF has,
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<PAGE>
however, recently sold $750 million of APF Shares through three public
offerings. In each offering, the offering price per APF Share, after giving
effect to the one-for-two stock split, equaled the exchange value. The offering
price was determined by APF based upon the estimated costs of investing in
restaurant properties and making mortgage loans, the fees to be paid to CNL
Fund Advisors, Inc. and its affiliates, as well as fees to third parties and
the expenses of the offerings. At March 31, 1999, APF has invested all of the
net offering proceeds to acquire restaurant properties, to make mortgage loans
and to pay fees and other expenses.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the Acquisition?
There are a number of material risks and considerations that you should
consider, including:
.We are uncertain as to the value at which APF Shares will trade following
listing.
. We have material conflicts in light of our being both general partners
of the Income Funds and members of APF's Board of Directors.
.Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
.As stated below, the Acquisition is a taxable transaction.
.The Acquisition involves a fundamental change in your investment.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's limited partners will be binding on you even if you vote against the
Acquisition.
Did you receive a fairness opinion in connection with APF's acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated rendered, an independent financial
advisor and investment bank, headquartered in Baltimore, Maryland, an opinion
with respect to the fairness, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the colored
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's acquisition of your
Income Fund. If you prefer, you may instead vote by telephone, following the
instructions on your consent form. If you sign and send in your consent form
and do not indicate how you want to vote, your consent form will be counted as
a vote "For" the Acquisition. If you do not vote or you abstain from voting, it
will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due
S-2
<PAGE>
, 2004 in an amount equal to 97% of your portion of the APF Share
consideration, based on the exchange value, that would otherwise have been paid
to your Income Fund. Please note that you may only receive the notes if you
vote "Against" the Acquisition, and you elect to receive notes on your consent
form. You will receive APF Shares if your Income Fund elects to be acquired in
the Acquisition and you vote "For" the Acquisition, or you vote "Against" the
Acquisition and do not affirmatively select the notes option on your consent
form. In addition, if Limited Partners in your Income Fund elect to receive
notes in an amount greater than 15% of the estimated value of APF Shares, based
on the exchange value, to be paid to your Income Fund, then APF has the right
to decline to acquire your Income Fund. The notes will not be listed on any
exchange or automated quotation system, and a market for the notes will not
likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs), if you are an
individual subject to income taxation or a tax-paying entity and you receive
APF Shares, the tax that you must pay will generally be based on the difference
between the value of the APF Shares you receive and the tax basis of your
units. If you elect to receive notes, your tax will be based upon your
allocable share of the gain which will be recognized by your Income Fund; your
Income Fund's gain will generally equal the excess, if any, of the value of the
APF Shares received by your Income Fund over the tax basis of your Income
Fund's net assets. Some of the gain may be subject to the 25% rate of tax
applicable to certain types of real property gain.
We urge you to consult with your tax advisor to evaluate the taxes that will
be incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $2,711. To
review the tax consequences to the Limited Partners of the Income Funds in
greater detail, see pages 180 through 194 of the consent solicitation and
"Federal Income Tax Considerations" in this supplement.
S-3
<PAGE>
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds acquired by
APF may be differently constructed, located in a different geographic area or
of a different restaurant chain than the restaurant properties owned by your
Income Fund. Because the market for real estate may vary from one region of the
country to another, the change in geographic diversity may expose you to
different and greater risks than those to which you are presently exposed. For
geographic information regarding APF's and the Income Funds' restaurant
properties, see "APF's Business and The Restaurant Properties--Business
Objectives and Strategies" and "--The Restaurant Properties--General" and
"Business of the Income Funds--Description of Restaurant Properties" in the
consent solicitation.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund. This description is qualified in its entirety
by the more detailed discussion in the section entitled "Risk Factors"
contained in the consent solicitation.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease below the exchange value upon listing.
Your Income Fund will be receiving 2,021,318 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices substantially below
the exchange value or the historical per share book value of the assets of APF.
The APF Shares have been approved for listing on the NYSE, subject to official
notice of issuance. Prior to listing, the existing APF stockholders have not
had an active trading market in which they could sell their APF Shares.
Additionally, any Limited Partners of the Income Funds who become APF
stockholders as a result of the Acquisition, will have transformed their
investment in non-tradable units into an investment in freely tradable APF
Shares. Consequently, some of these stockholders may choose to sell their APF
Shares upon listing at a time when demand for APF Shares may be relatively low.
The market price of the APF Shares may be volatile after the Acquisition, and
the APF Shares could trade at prices substantially less than the exchange value
as a result of increased selling activity following the issuance of the APF
Shares, the interest level of investors in purchasing the APF Shares after the
Acquisition and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund made $975, $1000 and $1,000, respectively, in distributions, per $10,000
investment to you. While historically, APF has made distributions equal to
7.625% per APF Share, based on the exchange value, we cannot be sure that APF
will be able to maintain this level of distributions in the future. In the
event that APF is unable to maintain this level of distributions in the future,
your distributions per $10,000 investment may decrease substantially after the
Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have three material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of
S-4
<PAGE>
the Income Funds. As Board members of APF, Messrs. Seneff and Bourne have a
different interest in the completion of the Acquisition which may conflict with
your interest as a Limited Partner of the Income Fund or with their own
positions as the general partners of your Income Fund. Second, assuming only
your Income Fund is acquired in the Acquisition, we will receive 27,797 APF
Shares. Finally, in the event that your Income Fund is not acquired, however,
we, as the general partners of your Income Fund, may be required to pay all or
a substantial portion of the Acquisition costs allocated to your Income Fund to
the extent that you or other Limited Partners of your Income Fund vote against
the Acquisition. For additional information regarding the Acquisition costs
allocated to your Income Fund, see "Comparison of Alternative Effect on
Financial Condition and Results of Operations" contained in this supplement.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own and lease on a triple-net basis, on the date that the Acquisition
is consummated, assuming only your Income Fund was acquired as of March 31,
1999, 549 restaurant properties. The risks inherent in investing in an
operating company such as APF include that APF may invest in new restaurant
properties that are not as profitable as APF anticipated, may incur substantial
indebtedness to make future acquisitions of restaurant properties which it may
be unable to repay and make mortgage loans to prospective operators of national
and regional restaurant chains which may not have the ability to repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds, if any, of a sale or
refinancing of your Income Fund's assets, to an investment in an entity in
which you may realize the value of your investment only through sale of your
APF Shares, not from liquidation proceeds from restaurant properties.
Continuation of your Income Fund would, on the other hand, permit you
eventually to receive liquidation proceeds from the sale of the Income Fund's
restaurant properties, and your share of these sale proceeds could be higher
than the amount realized from the sale of your APF Shares or from the
combination of cash paid to and payments on any notes if you elect to receive
the notes.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default 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. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization
S-5
<PAGE>
markets for the mortgage loans on favorable terms could be adversely affected
by a variety of factors, including adverse market conditions and adverse
performance of its loan portfolio or servicing responsibilities. If APF is
unable to access the securitization market, it would have to retain as assets
those mortgage loans it would otherwise securitize, thereby remaining exposed
to the related credit and repayment risks on such mortgage loans. Under such
circumstances, APF would also have to seek a different source for funding its
operations than securitizations.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
March 31, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.62x and its ratio of debt-to-total assets was
28.02%. If only your Income Fund were acquired as of that date, APF's debt
service ratio would have been 3.78x and its ratio of debt-to-total assets would
have been 26.97%. Up through the time immediately prior to the consummation of
the Acquisition, as a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former limited partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant
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<PAGE>
property is in a market in which APF has not invested before, APF will have
relatively little experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgages. APF
typically does not require that a third party guarantee the obligations of the
tenant or the borrower. The ability of the tenants or borrowers to pay their
obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to: (1)
national, regional and local economic conditions which may be adversely
affected by industry slowdowns, employer relocations, prevailing employment
conditions and other factors, and which may reduce consumer demand for the
products offered by APF's customers; (2) local real estate conditions; (3)
changes or weaknesses in specific industry segments; (4) perceptions by
prospective customers of the safety, convenience, services and attractiveness
of the restaurant chain; (5) changes in demographics, consumer tastes and
traffic patterns; (6) the ability to obtain and retain capable management; (7)
changes in laws, building codes, similar ordinances and other legal
requirements, including laws increasing the potential liability for
environmental conditions existing on properties; (8) the inability of a
particular restaurant chain's computer system, or that of its franchisor or
vendors, to adequately address Year 2000 issues; (9) increases in operating
expenses; and (10) increases in minimum wages, taxes, including income,
service, real estate and other taxes, or mandatory employee benefits.
APF has tenants of two significant restaurant chains that have filed for
bankruptcy protection.
The fact that APF has tenants of two significant restaurant chains that have
filed for bankruptcy protection may adversely affect APF's total rental, earned
and interest income. Because all of APF's properties are leased on a triple-net
basis, if a tenant has defaulted on its lease obligations or has declared
bankruptcy, it would reduce APF's rental, earned and interest income until APF
could lease those affected properties to a new tenant or tenants. As of March
31, 1999, your Income Fund had no tenants under bankruptcy protection, and
therefore, assuming that your Income Fund is acquired by APF, you, as an APF
stockholder or noteholder, may be subject to the adverse consequences
associated with having tenants under bankruptcy protection.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as a stockholder, would be reduced substantially for
each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to certain adjustments that are unique to REITs, a REIT generally
must distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
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Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
For a more detailed discussion of the risks associated with the Acquisition,
see "Risk Factors" in the consent solicitation.
CONSIDERATION PAID TO INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth information regarding the estimated value of
the consideration that your Income Fund will receive in the Acquisition. The
APF Shares payable to your Income Fund will not change if APF acquires fewer
than all of the Income Funds in the Acquisition. This data assumes that none of
the Limited Partners of your Income Fund have elected to receive notes. You
should note that the APF Shares may trade at prices substantially below the
exchange value upon listing on the NYSE.
<TABLE>
<CAPTION>
Original Limited Original Limited Estimated Value
Partner Investments Partner Investments of APF Shares
Less any Less any Distributions Number of Estimated Value Estimated Value per Average
Distributions of of Net Sales Proceeds APF Shares of APF Shares Estimated of APF Shares $10,000 Original
Net Sales per $10,000 Offered to Payable Acquisition after Acquisition Limited Partner
Proceeds(1) Original Investment(1) Income Fund to Income Fund Expenses Expenses Investment
- ------------------- ---------------------- ----------- --------------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$35,000,000 $10,000 2,021,318 $40,426,360 $460,000 $39,966,360 $11,261
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2004. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2004. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest. For more detailed information, see "The Acquisition" and
"Description of the Notes" in the consent solicitation.
EXPENSES OF THE ACQUISITIONS
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
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<PAGE>
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1).................................................... $ 22,849
Appraisals and Valuation(2)...................................... 5,940
Fairness Opinions(3)............................................. 30,000
Solicitation Fees(4)............................................. 18,791
Printing and Mailing(5).......................................... 122,578
Accounting and Other Fees(6)..................................... 47,322
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Subtotal....................................................... 247,480
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(7)........................ 97,500
Legal Closing Fees(8)............................................ 48,159
Partnership Liquidation Costs(9)................................. 66,861
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Subtotal....................................................... 212,520
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Total............................................................ $460,000
========
</TABLE>
--------
(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $312,063. Your
Income Fund's pro-rata portion of these fees was determined based
on the percentage of the value of the APF Share consideration
payable to your Income Fund, based on the exchange value, to the
total value of the APF Share consideration payable to all of the
Income Funds, based on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the
Income Funds in connection with the Acquisition were $105,420. Your
Income Fund's pro-rata portion of these fees was determined based
on number of restaurant properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and
incurred a fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $249,626. Your
Income Fund's pro-rata portion of these fees was determined based
on the number of Limited Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to be
$1,610,399. Your Income Fund's pro-rata portion of these fees was
determined based on the number of Limited Partners in your Income
Fund.
(6) Aggregate accounting and other fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to be
$683,904. Your Income Fund's pro-rata portion of these fees was
determined based on the percentage of your Income Fund's total
assets as of March 31, 1999 to the total assets of all of the
Income Funds as of March 31, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by
all of the Income Funds in connection with the Acquisition is
estimated to be $1,312,808. Your Income Fund's pro-rata portion of
these fees was determined based on the percentage of the value of
the APF Share consideration payable to your Income Fund, based on
the exchange value, to the total value of the APF Share
consideration payable to all of the Income Funds, based on the
exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,454. Your
Income Fund's pro-rata portion of these fees was determined based
on the percentage of your Income Fund's total assets as of March
31, 1999 to the total assets of all of the Income Funds as of March
31, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of
the Income Funds in connection with the Acquisition is estimated to
be $895,326. Your Income Fund's pro-rata portion of these costs was
determined based on the percentage of the value of the APF Share
consideration payable to your Income Fund, based on the exchange
value, to the total value of the APF Share consideration payable to
all of the Income Funds, based on the exchange value.
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The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 80% or more in value of your Income Fund's
restaurant properties acquired within two years of the initial date of the
prospectus (August 1990). Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding units.
Consequence of Failure to Approve the Acquisition
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition, the Acquisition may
not be consummated under the terms of the partnership agreement. In such event,
we plan to continue to operate your Income Fund as a going concern and to
eventually dispose of your Income Fund's restaurant properties approximately 7
to 12 years after they were acquired or as soon thereafter if, in our opinion,
market conditions permit, as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at . We and
members of APF's management intend to solicit actively your support for the
Acquisition and would like to use the special meeting to answer questions about
the Acquisition and the solicitation materials and to explain in person our
reasons for recommending that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain their votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund of your Income
Fund must approve the Acquisition. Your Income Fund will be acquired by a
merger with the Operating Partnership, in the manner described in the consent
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<PAGE>
solicitation. A copy of the Agreement and Plan of Merger dated March 11, 1999,
as amended on June 4, 1999, by and between APF and your Income Fund is attached
hereto as Appendix B. We encourage you to read it.
If you are not planning on attending the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you (on or about
, 1999 and will continue until the later of (a) , 1999, a date not
less than 60 calendar days from the initial delivery of the solicitation
materials, or (b) such later date as we may select and as to which we give you
notice. At our discretion, we may elect to extend the solicitation period.
Under no circumstances will the solicitation period be extended beyond March
31, 2000. Any consent form received by Corporate Election Services prior to
5:00 p.m., Eastern time, on the last day of the solicitation period will be
effective provided that such consent form has been properly completed and
signed. If you fail to return a signed consent form by the end of the
solicitation period, your units will be counted as voting "Against" the
Acquisition of your Income Fund and you will receive APF Shares if your Income
Fund is acquired. If you prefer, you may instead vote by telephone according to
the instructions on your consent form.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the quarter
ended March 31, 1999, the aggregate amounts accrued or paid by your Income Fund
to us are shown below under "Historical Distributions Paid to the General
Partners and Affiliates" and the estimated amounts of compensation that
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<PAGE>
would have been paid had the Acquisition been in effect for the periods
presented, are shown below under "Pro Forma Distributions to Be Paid to the
General Partners Following the Acquisition":
<TABLE>
<CAPTION>
Year Ended December 31, Quarter Ended
------------------------ March 31,
1996 1997 1998 1999
-------- ------- ------- -------------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the
General Partners and Affiliates:
General Partner Distributions
Broker/Dealer Commissions............. -- -- -- --
Accounting and Administrative
Services.............................. $ 89,317 $80,461 $96,202 $22,371
Due Diligence and Marketing Support
Fees.................................. -- -- -- --
Acquisition Fees....................... -- -- -- --
Asset Management Fees.................. -- -- -- --
Real Estate Disposition Fees(1)........ 41,250 -- -- --
-------- ------- ------- -------
Total historical..................... $130,567 $80,461 $96,202 $22,371
Pro Forma Distributions to Be Paid to
the General Partners Following the
Acquisition:
Cash Distributions on APF Shares....... 11,380 31,982 $53,746 $12,121
Salary Compensation.................... -- -- -- --
-------- ------- ------- -------
Total pro forma...................... $ 11,380 $31,982 $53,746 $12,121
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to certain minimum
returns to the Limited Partners.
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
contained herein under the caption "Financial Statements" and in the consent
solicitation under the caption "Summary--Our Reasons for Supporting the
Acquisition--Prices for Income Fund Units."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31, 1999
--------------------------- --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ----- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income.... $936 $944 $875 $ 917 $ 931 $191 $143
Distributions from Return of
Capital(1).................. 9 6 100 $ 83 69 34 103
---- ---- ---- ----- ------ ---- ----
Total...................... $945 $950 $975 1,000 $1,000 $225 246
==== ==== ==== ===== ====== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from certain non-cash
items. This amount is not required to be presented as a return of capital
except for purposes of this table, and the Income Fund has not treated this
amount as a return of capital for any other purpose.
Cash distributions for the year ended December 31, 1997, include $350,000 of
amounts earned in 1997, but declared payable in the first quarter of 1998.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses during 1999. Thus, the pro forma information regarding
the distributions to APF stockholders for the quarter ended March 31, 1999 is
not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
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<PAGE>
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the Acquisition
with those of several alternatives, the Acquisition is more economically
attractive to you and the other Limited Partners than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to certain closing conditions. Second, if your Income Fund is acquired
all Limited Partners of your Income Fund who vote against the Acquisition will
be given the option of receiving APF Shares or the notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others, that we will be relieved
from certain ongoing liabilities with respect to the Income Fund if it is
acquired by APF. For a further discussion of the conflicts of interest and
potential benefits of the Acquisition to us, see "Conflicts of Interest" below.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the values of the
consideration which would have been received by you and the other Limited
Partners in alternative transactions and concluded that the Acquisition is fair
based on such comparison. In addition, we believe the Acquisition is the best
way to maximize the return on your investment because of your ability to
participate in the potential appreciation of APF Shares. Since the investment
in your Income Fund is an investment in a static portfolio due to the
restrictions contained in your Income Fund's partnership agreement and limited
capital resources, your investments have less of an opportunity to appreciate.
Because APF is a growth-oriented operating company, you will have the
opportunity, as an APF stockholder, to participate in APF's future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms
S-13
<PAGE>
underlying our belief as to fairness are partially based upon the appraisal of
your Income Fund's restaurant properties prepared by Valuation Associates and
upon the fairness opinion provided by Legg Mason. A copy of the fairness
opinion is attached hereto as Appendix A. We encourage you to read it. We
attributed significant weight to the appraisal of Valuation Associates and the
fairness opinions of Legg Mason, which we believe support our conclusion that
the Acquisition is fair to the Limited Partners. We do not know of any factors
that would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinions of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., an affiliate of CNL Group, Inc. and (3) Valuation
Associates has previously performed valuation appraisals for APF. See "Reports,
Opinions and Appraisals" in the consent solicitation.
On rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to, any other
aspect of the Acquisition, including:
.the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition or
the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Legg Mason's opinion also does not compare the relative merits of the
Acquisition with those of any other transaction or business strategy which were
or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares will exceed the going concern value and
liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Net Book Value of the Income Fund. We calculated the book value of your
Income Fund under generally accepted accounting principles, or GAAP, as of
March 31, 1999 per average $10,000 original investment. Since the calculation
of the book value was done on a GAAP basis, it is primarily based on
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<PAGE>
historical cost and, therefore, it is not indicative of the true fair market
value of your Income Fund. This figure was compared to three other figures:
(1) the value of the Fund if it commenced an orderly liquidation of its
investment portfolio on December 31, 1998,
(2) the value of the Fund if it continued to operate in accordance with
its existing partnership agreement and business plans, and
(3) the estimated value of the APF Shares, based on the exchange value,
paid to each Income Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated Value
of APF Shares
Original per Average
Limited Partner $10,000
Investments Less GAAP Going Original
any Distributions Book Liquidation Concern Limited Partner
of Sales Proceeds(1) Value Value(2) Value(2) Investment
-------------------- ------ ----------- -------- ---------------
<S> <C> <C> <C> <C> <C>
CNL Income Fund VIII,
Ltd. .................. 10,000 $8,726 $10,472 $11,227 $11,261
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
(2) Liquidation and going concern values were based on appraisals prepared by
Valuation Associates. For a complete description of the methodologies
employed by Valuation Associates, see "Reports, Opinions and Appraisals" in
the consent solicitation.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have contractual
obligations pursuant to your Income Fund's partnership agreement as well as
state law to assess whether the terms of the Acquisition are fair and equitable
to the Limited Partners of your Income Fund without regard to whether the
Acquisition is fair and equitable to any of the other participants, including
the Limited Partners in other Income Funds. James M. Seneff, Jr. and Robert A.
Bourne act as the individual general partners of all of the Income Funds and
also as members of the Board of Directors of APF. While Messrs. Seneff and
Bourne have sought faithfully to discharge their obligations to your Income
Fund, there is an inherent conflict of interest in serving, directly or
indirectly, in a similar capacity with respect to your Income Fund and also on
APF's Board of Directors.
Lack of Independent Representation
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received. If an independent representative
had been retained for the Income Funds, either collectively or on an individual
basis, the fees and expenses of the Acquisition would have been higher. No
group of Limited Partners was empowered to negotiate the terms and conditions
of the Acquisition or to determine what procedures should be used to protect
the rights and interests of the Limited Partners. In addition, no investment
banker, attorney, financial consultant or expert was engaged to represent the
interests of the Limited Partners. We have been the parties responsible for
structuring all the terms and conditions of the Acquisition. Legal counsel
engaged to assist with the preparation of the documentation for the
Acquisition, including this consent solicitation, was engaged by us and did not
serve, or purport to serve, as legal counsel for the Income Funds or Limited
Partners. If an independent representative had been retained for the Income
Funds, the terms of the Acquisition may have been different and possibly more
favorable to the Limited Partners. In particular, had separate representation
for each of the Income Funds been arranged by us, issues unique to the value of
each of the specific Income Funds might have been highlighted or received
greater
S-15
<PAGE>
attention, resulting in adjustments to the value assigned to the assets of such
Income Funds and increasing the number of APF Shares or notes that would be
allocable to such Income Fund if acquired in the Acquisition.
Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive three material benefits. These benefits include:
. With respect to our ownership in your Income Fund, we may be issued up to
27,797 APF Shares in the aggregate in accordance with the terms of your
Income Fund's partnership agreement. The 27,797 APF Shares issued to us
will have an estimated value, based on the exchange value of
approximately $555,940.
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr. Seneff
serving as Chairman of APF and Mr. Bourne serving as Vice Chairman.
Furthermore, they will be entitled to receive performance-based
incentives, including stock options under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of the Income Funds, we are legally liable for all of
Income Funds liabilities to the extent that the Income Funds are unable
to satisfy such liabilities. Because the partnership agreement for each
Income Fund prohibits the Income Funds from incurring indebtedness, the
only liabilities the Income Funds have are liabilities with respect to
their ongoing business operations. In the event that one or more Income
Funds are acquired by APF, we would be relieved of our legal obligation
to satisfy the liabilities of the acquired Income Fund or Income Funds.
S-16
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Certain Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund. If
your Income Fund is acquired by APF, and you have voted "For" the Acquisition,
you will receive APF Shares. If you have voted "Against" the Acquisition but
your Income Fund is acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under certain circumstances, even
if APF were to make the same level of distributions as your Income Fund, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you. For certain other differences attributable to APF's status as a REIT,
see "--Taxation of APF" and "--Taxation of Stockholders --Taxable Domestic
Stockholders" in the consent solicitation.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF, the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain and loss based on the
exchange value, for an average $10,000 original Limited Partner investment in
your Income Fund, is set forth in the table below for those Limited Partners
subject to federal income taxation.
S-17
<PAGE>
<TABLE>
<CAPTION>
Estimated
Gain/(Loss) per
Average $10,000
Original Limited
Partner Investment(1)
---------------------
<S> <C>
CNL Income Fund VIII, Ltd. ............................... $2,711
</TABLE>
- --------
(1) Values are based on the exchange value established by APF. Upon listing
the APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be significantly below the exchange value.
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one more individuals or entities in exchange for the stock of that corporation,
and (2) immediately after the exchange, such individuals or entities are in
control of the corporation. For purposes of section 351(a), control is defined
as the ownership of stock possessing at least 80 percent of the total combined
voting power of all classes of stock entitled to vote and at least 80 percent
of the total number of shares of all other classes of stock of the corporation.
APF has represented to Shaw Pittman, APF's tax counsel, that, following the
Acquisition, the Limited Partners of the Income Funds will not own stock
possessing at least 80 percent of the total combined voting power of all
classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between;
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if any,
assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2004, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses
S-18
<PAGE>
that you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the Cash/Notes Option may recognize gain in the year
of the Acquisition despite the fact that they will not receive cash with which
to pay the tax on the gain. Such Limited Partners will adjust the basis of the
notes as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes. See "--Tax Consequences of Liquidation and
Termination of Your Income Fund" below.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition including gain or loss resulting from the Acquisition. If
your taxable year is not the calendar year, you could be required to recognize
as income in a single taxable year your share of your Income Fund's income
attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units, and your holding period
for the notes for purposes of determining capital gain or loss from the
disposition of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold Units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17) or
(20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
S-19
<PAGE>
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
For a discussion of the taxation of APF, see "Federal Income Tax
Considerations--Taxation of APF" in the consent solicitation.
S-20
<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 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 2,307,364 1,391,466 8,137 (2,450,663)(b),(c)
Interest and
Other Income..... 2,214,763 0 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 0 1,095,269 2,563,714 1,323,577 64,186 (377,734)(e)
Management and
Advisory Fees.... 697,364 0 697,364 0 0 611,196 (1,308,560)(f)
Fees to Related
Parties.......... 0 0 0 23,326 292,575 0 (292,786)(g)
Interest
Expense.......... 0 0 0 50,730 0 4,769,268 0
State Taxes...... 235,208 0 235,208 0 0 0 0
Depreciation--
Other............ 0 0 0 39,581 26,238 0 0
Depreciation--
Property......... 1,548,813 349,465(a) 1,898,278 0 0 0 0
Amortization..... 7,368 0 7,368 0 0 0 535,801 (h)
Transaction
Costs............ 125,926 0 125,926 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
Total Expenses.. 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650 (1,443,279)
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) $ (945,316)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 0 17,271 0 0 0 0
Gain on Sale of
Properties....... 0 0 0 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 (215,797) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
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) (945,316)
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) $(1,193,995)
=========== ========== =========== ========== ========== ========== ===========
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund VIII, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $14,523,161 $733,127 $ 44,498 (j) $15,300,786
Fees............. 1,256,304 0 ( 12,934)(k) 1,243,370
Interest and
Other Income..... 7,687,325 54,365 0 7,741,690
------------ ---------- ------------------ ------------
Total Revenue... $23,466,790 $787,492 $ 31,564 $24,285,846
Expenses:
General and
Administrative... 4,669,012 43,381 ( 23,730)(l),(m) 4,688,663
Management and
Advisory Fees.... 0 0 0 (n) 0
Fees to Related
Parties.......... 23,115 0 0 23,115
Interest
Expense.......... 4,819,998 0 0 4,819,998
State Taxes...... 235,208 17,534 8,244 (o) 260,986
Depreciation--
Other............ 65,819 0 0 65,819
Depreciation--
Property......... 1,898,278 75,047 44,701 (p) 2,018,026
Amortization..... 543,169 0 0 543,169
Transaction
Costs............ 125,926 33,563 0 159,489
------------ ---------- ------------------ ------------
Total Expenses.. 12,380,525 169,525 29,215 12,579,265
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties and
Provision for
Losses on
Properties....... $11,086,265 $617,967 $ 2,349 $11,706,581
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 56,876 (13,901)(q) 60,246
Gain on Sale of
Properties....... 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 0 (215,797)
------------ ---------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 10,887,739 674,843 (11,552) 11,551,030
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ---------- ------------------ ------------
Net
Earnings(Losses).. $10,887,739 $674,843 $ (11,552) $11,551,030
============ ========== ================== ============
</TABLE>
S-21
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustment Subtotal Advisor Services, Inc. Corp. Adjustments
------------ ----------- ------------ ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 513 29 542 n/a n/a n/a n/a
============ =========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 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
============ =========== ============ ========== ========== ============ ===========
Weighted average
units
outstanding
during period... n/a n/a n/a n/a n/a n/a n/a
============ =========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,401 n/a 37,347,401 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 n/a 37,348,464 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... 14,237,405 n/a n/a n/a n/a n/a n/a
Cash
distributions
declared per
$10,000
Investment...... 191 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 $ -- $ -- $ -- $ 0
Mortgages/notes
receivable...... $ 41,269,740 0 $ 41,269,740 $ -- $ -- $247,896,287 $ 0
Accounts
receivable,
net............. $ 548,862 0 $ 548,862 $7,141,967 $5,457,493 $ 1,969,339 $ (148,629)(w)
Investment
in/due from
joint ventures.. $ 1,083,564 0 $ 1,083,564 $ -- $ -- $ -- 0
Total assets.... $708,694,145 $33,656,518(u) $742,350,663 $8,223,820 $6,308,406 $264,700,433 $31,867,156 (v1),(w)
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 $32,287,526 (v1),(x)
<CAPTION>
Historical
CNL Income
Combined Fund VIII, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- ------------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 542 36 n/a 578
============== =========== ==================== ==================
Earnings per
share/unit...... $ n/a $ 0.02 $ n/a $ 0.25
============== =========== ==================== ==================
Book value per
share/unit...... $ n/a $ 0.87 $ n/a $ 16.41
============== =========== ==================== ==================
Dividends per
share/unit...... $ n/a $ 0.02 $ n/a $ n/a
============== =========== ==================== ==================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 3.27x
============== =========== ==================== ==================
Weighted average
units
outstanding
during period... n/a 35,000,000 n/a n/a
============== =========== ==================== ==================
Weighted average
shares
outstanding
during period... 43,497,401 n/a 1,998,318 45,495,719 (r)
============== =========== ==================== ==================
Shares
outstanding..... 43,498,464 n/a 1,998,318 45,496,782
============== =========== ==================== ==================
Cash
distributions
declared:....... n/a 787,501 n/a $ 19,838,799 (s)
==================
Cash
distributions
declared per
$10,000
Investment...... n/a 225 n/a $ 218 (t)
==================
Balance sheet
data:
Real estate
assets, net..... $ 647,547,023 $23,457,171 $12,749,749 (v2) $ 683,753,943
Mortgages/notes
receivable...... $ 289,166,027 $ 1,526,082 $ 0 $ 290,692,109
Accounts
receivable,
net............. $ 14,969,032 $ 1,079 $ (58,095)(y) $ 14,912,016
Investment
in/due from
joint ventures.. $ 1,083,564 $ 2,785,272 $ 1,796,225 (v2) $ 5,665,061
Total assets.... $1,053,450,478 $31,661,070 $ 9,365,609 (v2),(y) $1,094,477,157
Total
liabilities..... $ 346,929,801 $ 1,118,421 $ (58,095)(y) $ 347,990,127
Total equity.... $ 706,520,677 $30,542,649 $ 9,423,704 (v2) $ 746,487,030
</TABLE>
S-22
<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 Advisor,
the CNL Restaurant Financial Services Group and the Income Fund:
<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 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
</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>
(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)
<TABLE>
<S> <C>
Amortization of goodwill...................... $535,801
</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 $44,498 in accrued rental income resulting from the straight-
lining of scheduled rent increases throughout the lease terms for the
leases acquired from the Income Fund as if the leases had been acquired on
January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income Fund:
<TABLE>
<S> <C>
Management fees.............................. $ 0
Reimbursement of administrative costs........ (12,934)
--------
$(12,934)
========
</TABLE>
S-23
<PAGE>
(l) Represents the elimination of $12,934 in administrative costs reimbursed by
the Income Fund to the Advisor.
(m) Represents savings of $10,796 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income Fund to
the Advisor.
(o) Represents additional state income taxes of $8,244 resulting from assuming
that acquisitions of properties that had been operational when APF acquired
them from January 1, 1999 through May 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 Fund 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 $44,701 as a result of
adjusting the historical basis of the real estate wholly owned by the
Income Fund to fair value as a result of accounting for the Acquisition of
the Income Fund under the purchase accounting method. The adjustment to the
basis of the buildings is being depreciated using the straight-line method
over the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $13,901 as a
result of adjusting the historical basis of the real estate owned by the
Income Fund, indirectly through joint venture or tenancy in common
arrangements, to fair value as a result of accounting for the Acquisition
of the Income Fund under the purchase accounting method. The adjustment to
the basis of the buildings owned indirectly by the Income Fund is being
depreciated using the straight-line method over the remaining useful lives
of the properties.
(r) Common shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 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 Fund 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 1,998,317.65 8,148,317.65
Exchange Value.......... $ 20 $ 20 $ 20 $ 20
Share Consideration..... $76,000,000 $47,000,000 $ 39,966,353 $162,966,353
Cash Consideration...... -- -- 460,000 460,000
APF Transaction Costs... 4,977,337 3,078,090 2,647,573 10,703,000
----------- ----------- ------------ ------------
Total Purchase Price... $80,977,337 $50,078,090 $ 43,073,926 $174,129,353
=========== =========== ============ ============
Allocation of Purchase
Price:
Net Assets-Historical... $ 7,141,252 $10,006,878 $ 30,542,649 $ 47,690,779
Purchase Price
Adjustments:
Land and buildings on
operating leases...... 10,157,967 10,157,967
Net investment in
direct financing
leases................ 2,591,782 2,591,782
Investment in joint
ventures.............. 1,796,225 1,796,225
Accrued rental income.. (1,950,689) (1,950,689)
Intangibles and other
assets................ (2,792,876) (64,008) (2,856,884)
Goodwill*.............. 42,864,088 -- 42,864,088
Excess purchase price.. 73,836,085 -- -- 73,836,085
----------- ----------- ------------ ------------
Total Allocation....... $80,977,337 $50,078,090 $ 43,073,926 $174,129,353
=========== =========== ============ ============
</TABLE>
--------
*Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
S-24
<PAGE>
The APF Transaction costs of $10,703,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,836,085 was
expensed at March 31, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations". Goodwill of 42,864,088 relating to the acquisition
of the CNL Financial Services Group is being amortized over 20 years. APF
did not acquire any intangibles as part of any of the acquisitions. The
entries were as follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC)--Class A............ 8,600
Common Stock (CFA, CFS, CFC)--Class B............. 4,825
APIC (CFA, CFS, CFC).............................. 13,857,645
Retained Earnings................................. 3,277,060
Accumulated distributions in excess of earnings... 73,836,085
Goodwill for CFC (Intangibles and other assets)... 42,864,088
CFC/CFS Org Costs/Other Assets.................. 2,792,876
Cash to pay APF transaction costs............... 8,055,427
APF Common Stock................................ 61,500
APF APIC........................................ 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital................................. 30,542,649
Land and buildings on operating leases............ 10,157,967
Net investment in direct financing leases......... 2,591,782
Investment in joint ventures...................... 1,796,225
Accrued rental income........................... 1,950,689
Intangibles and other assets.................... 64,008
Cash to pay APF Transaction costs............... 2,647,573
Cash consideration to Income Funds.............. 460,000
APF Common Stock................................ 19,983
APF APIC........................................ 39,946,370
(To record acquisition of Income Fund)
</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 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.
(y) Represents the elimination by the Income Fund of $58,095 in related party
payables recorded as receivables by the Advisor.
S-25
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND VIII, LTD.
The following table sets forth certain financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
VIII, Ltd." in this supplement.
<TABLE>
<CAPTION>
Quarter Ended March 31, Year Ended December 31,
----------------------------------- -----------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues(1)............. $ 844,368 $ 903,268 3,625,906 $ 3,619,489 $ 3,593,610 $ 3,667,137 3,670,207
Net income(2)........... 674,843 807,808 3,288,912 3,241,567 3,096,992 3,336,755 3,308,267
Cash distributions
declared(3)............ 787,501 1,137,500 3,850,003 3,150,003 3,412,500 3,325,002 3,307,500
Net income per unit(2).. 0.019 0.023 0.093 0.092 0.088 0.094 0.094
Cash distributions
declared per unit(3)... 0.023 0.033 0.110 0.090 0.098 0.095 0.095
GAAP book value per
unit................... 0.873 0.882 0.876 0.892 0.889 0.898 0.898
Weighted average number
of Limited Partner
Units outstanding...... 35,000,000 35,000,000 35,000,000 35,000,000 35,000,000 35,000,000 35,000,000
<CAPTION>
March 31, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $31,661,070 $32,330,772 $32,071,119 $32,258,296 $32,437,106 $32,575,586 $32,615,349
Total partners' capi-
tal.................... 30,542,649 30,886,706 30,655,307 31,216,398 31,124,834 31,440,342 31,428,589
</TABLE>
- --------
(1) Revenues include equity in earnings of unconsolidated joint ventures and
minority interest in income of the consolidated joint venture.
(2) Net income for the years ended December 31, 1998 and 1995, includes
$108,176 and $71,638, respectively, from a gain on sale of land and
building. In addition, net income for the years ended December 31, 1996 and
1995, includes $99,031 and $11,712, respectively, from a loss on sale of
land and buildings.
(3) Distributions for the year ended December 31, 1998, include an additional
special distribution to the Limited Partners of $350,000 declared the first
quarter of 1998 from cumulative excess operating reserves. Distributions
for the years ended December 31, 1998, 1996 and 1995, include a special
distribution to the Limited Partners of $350,000, $262,500 and $175,000,
respectively, which represented cumulative excess operating reserves.
S-26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND VIII, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
August 18, 1989, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurants, as well as land
upon which restaurants were to be constructed, which are leased primarily to
operators of national and regional fast-food and family-style restaurant
chains. The leases are triple-net leases, with the lessees responsible for all
repairs and maintenance, property taxes, insurance and utilities. As of 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
S-27
<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
S-28
<PAGE>
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
S-29
<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
S-30
<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.
S-31
<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.
S-32
<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
S-33
<PAGE>
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>
S-34
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998...... F-1
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998.................................................................... F-2
Condensed Statements of Partner's Capital for the Quarter Ended March 31,
1999 and for the Year Ended December 31, 1998........................... F-3
Condensed Statements of Cash Flows for the Quarter Ended March 31, 1999
and 1998................................................................ F-4
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998........................................................... F-5
Report of Independent Accountants........................................ F-7
Balance Sheets as of December 31, 1998 and 1997.......................... F-8
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-9
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-10
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-12
Unaudited Pro Forma Financial Information................................ F-21
Unaudited Pro Forma Balance Sheet as of March 31, 1999................... F-22
Unaudited Pro Forma Statement of Earnings for the Quarter Ended March 31,
1999.................................................................... F-24
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998.................................................................... F-26
Unaudited Pro Forma Statement of Cash Flows for the Quarter Ended March
31, 1999................................................................ F-28
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................ F-30
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements.............................................................. F-32
</TABLE>
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
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-1
<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-2
<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-3
<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-4
<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-5
<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. 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-6
<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-7
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $15,769,278 $13,960,232
Net investment in direct financing leases............. 7,802,785 10,044,975
Investment in joint ventures.......................... 2,809,759 2,877,717
Mortgage notes receivable............................. 1,811,726 1,853,386
Cash and cash equivalents............................. 1,809,258 1,602,236
Receivables, less allowance for doubtful accounts of
$24,636 and $19,228.................................. 84,265 51,393
Prepaid expenses...................................... 3,959 4,357
Accrued rental income, less allowance for doubtful
accounts of $4,501 in 1998 and 1997.................. 1,927,418 1,811,329
Other assets.......................................... 52,671 52,671
----------- -----------
$32,071,119 $32,258,296
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 4,258 $ 8,359
Escrowed real estate taxes payable.................... 27,838 24,459
Distributions payable................................. 1,137,501 787,501
Due to related parties................................ 75,266 59,649
Rents paid in advance and deposits.................... 62,349 53,556
----------- -----------
Total liabilities................................... 1,307,212 933,524
Minority interest..................................... 108,600 108,374
Partners' capital..................................... 30,655,307 31,216,398
----------- -----------
$32,071,119 $32,258,296
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases... $ 1,897,209 $ 1,804,273 $ 1,867,968
Earned income from direct financing
leases............................... 1,093,839 1,211,369 1,314,090
Contingent rental income.............. 101,911 85,735 31,712
Interest and other income............. 269,744 238,338 127,246
----------- ----------- -----------
3,362,703 3,339,715 3,341,016
----------- ----------- -----------
Expenses:
General operating and administrative.. 146,943 140,586 156,177
Professional services................. 24,837 23,284 27,682
State and other taxes................. 5,372 5,081 4,757
Depreciation.......................... 246,976 208,971 208,971
Transaction costs..................... 21,042 -- --
----------- ----------- -----------
445,170 377,922 397,587
----------- ----------- -----------
Income Before Minority Interest in
Income of Consolidated Joint Venture,
Equity in Earnings of Unconsolidated
Joint Ventures and Gain (Loss) on Sale
of Land and Buildings.................. 2,917,533 2,961,793 2,943,429
Minority Interest in Income of
Consolidated Joint Venture............. (13,518) (13,706) (13,906)
Equity in Earnings of Unconsolidated
Joint Ventures......................... 276,721 293 ,480 266,500
Gain (Loss) on Sale of Land and
Buildings.............................. 108,176 -- (99,031)
----------- ----------- -----------
Net Income.............................. $ 3,288,912 $ 3,241,567 $ 3,096,992
=========== =========== ===========
Allocation of Net Income:
General partners...................... $ 31,807 $ 32,416 $ 31,413
Limited partners...................... 3,257,105 3,209,151 3,065,579
----------- ----------- -----------
$ 3,288,912 $ 3,241,567 $ 3,096,992
=========== =========== ===========
Net Income Per Limited Partner Unit..... $ 0.093 $ 0.092 $ 0.088
=========== =========== ===========
Weighted Average Number of Limited
Partner Units Outstanding.............. 35,000,000 35,000,000 35,000,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $161,612 $35,000,000 $(15,772,138) $16,064,868 $(4,015,000) $31,440,342
Distributions to
limited partners
($0.098 per limited
partner unit)......... -- -- -- (3,412,500) -- -- (3,412,500)
Net income............. -- 31,413 -- -- 3,065,579 -- 3,096,992
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 193,025 35,000,000 (19,184,638) 19,130,447 (4,015,000) 31,124,834
Distributions to
limited partners
($0.090 per limited
partner unit)......... -- -- -- (3,150,003) -- -- (3,150,003)
Net income............. -- 32,416 -- -- 3,209,151 -- 3,241,567
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 225,441 35,000,000 (22,334,641) 22,339,598 (4,015,000) 31,216,398
Distributions to
limited partners
($0.110 per limited
partner unit)......... -- -- -- (3,850,003) -- -- (3,850,003)
Net income............. -- 31,807 -- -- 3,257,105 -- 3,288,912
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $257,248 $35,000,000 $(26,184,644) $25,596,703 $(4,015,000) $30,655,307
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............. $ 3,144,635 $ 3,114,439 $ 3,222,903
Distributions from unconsolidated joint
ventures.............................. 344,643 356,589 323,531
Cash paid for expenses................. (185,270) (163,215) (194,218)
Interest received...................... 258,584 235,243 110,452
----------- ----------- -----------
Net cash provided by operating
activities........................... 3,562,592 3,543,056 3,462,668
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
buildings............................. 116,397 -- --
Additions to land and buildings on
operating leases...................... -- -- (1,135)
Investment in direct financing leases.. -- -- (1,326)
Investment in joint venture............ -- -- (234,059)
Collections on mortgage notes
receivable............................ 41,292 8,799 2,557
Other.................................. 36 -- (34,793)
----------- ----------- -----------
Net cash provided by (used in)
investing activities................. 157,725 8,799 (268,756)
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners...... (3,500,003) (3,412,502) (3,325,000)
Distributions to holder of minority
interest.............................. (13,292) (13,391) (13,503)
----------- ----------- -----------
Net cash used in financing
activities........................... (3,513,295) (3,425,893) (3,338,503)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ 207,022 125,962 (144,591)
Cash and Cash Equivalents at Beginning
of Year................................ 1,602,236 1,476,274 1,620,865
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,809,258 $ 1,602,236 $ 1,476,274
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 3,288,912 $ 3,241,567 $ 3,096,992
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 246,976 208,971 208,971
Minority interest in income of
consolidated joint venture............ 13,518 13,706 13,906
Equity in earnings of unconsolidated
joint ventures, net of distributions.. 67,922 63,109 57,031
Loss (gain) on sale of land and
buildings............................. (108,176) -- 99,031
Decrease (increase) in receivables..... (32,504) (25,641) 429
Decrease (increase) in prepaid
expenses.............................. 398 20 (1,465)
Decrease in net investment in direct
financing leases...................... 177,947 178,250 157,194
Increase in accrued rental income...... (116,089) (128,736) (219,757)
Increase (decrease) in accounts payable
and accrued expenses.................. (722) 9,987 12,203
Increase (decrease) in due to related
parties............................... 15,617 2,769 (4,505)
Increase (decrease) in rents paid in
advance and deposits.................. 8,793 (20,946) 42,638
----------- ----------- -----------
Total adjustments..................... 273,680 301,489 365,676
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,562,592 $ 3,543,056 $ 3,462,668
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Mortgage notes accepted in exchange for
sale of land and buildings............ $ -- $ -- $ 1,375,000
=========== =========== ===========
Distributions declared and unpaid at
December 31........................... $ 1,137,501 $ 787,501 $ 1,050,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund VIII, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
method. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review the properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through operations. The general partners determine whether an
impairment in value has occurred by comparing the estimated future undiscounted
cash flows, including the residual value of the property, with the carrying
cost of the individual property. If an impairment is indicated, the assets are
adjusted to their fair value. Although the general partners have made their
best estimate of these factors based on current conditions, it is reasonably
possible that changes could occur in the near term which could adversely affect
the general partners' estimate of net cash flows expected to be generated from
its properties and the need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership
F-12
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
continues to pursue collection of such amounts. If amounts are subsequently
determined to be uncollectible, the corresponding receivable and the allowance
for doubtful accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership accounts for its 87.68%
interest in Woodway Joint Venture using the consolidation method. Minority
interest represents the minority joint venture partner's proportionate share of
the equity in the Partnership's consolidated joint venture. All significant
intercompany accounts and transactions have been eliminated.
The Partnership's investments in Asheville Joint Venture, CNL Restaurant
Investments II and Middleburg Joint Venture are accounted for using the equity
method since the Partnership shares control with affiliates which have the same
general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
2. Leases:
The Partnership leases its land and buildings primarily to operators of
national and regional fast-food and family-style restaurants. The leases are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 13, "Accounting for Leases." Some of the leases have been
classified as operating leases and some of the leases have been classified as
direct financing leases. For property leases classified as direct financing
leases, the building portions of the majority of property leases are accounted
for as direct financing leases while the land portions of these leases are
accounted for as operating leases. Substantially all leases are for 15 to 20
years and provide for minimum and contingent rentals. In addition, the tenant
pays all
F-13
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
property taxes and assessments, fully maintains the interior and exterior of
the building and carries insurance coverage for public liability, property
damage, fire and extended coverage. The lease options generally allow tenants
to renew the leases for two to four successive five-year periods subject to the
same terms and conditions of the initial lease. Most leases also allow the
tenant to purchase the property at fair market value after a specified portion
of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................... $ 9,159,115 $ 9,167,336
Buildings.......................................... 8,295,673 6,231,430
----------- -----------
17,454,788 15,398,766
Less accumulated depreciation...................... (1,685,510) (1,438,534)
----------- -----------
$15,769,278 $13,960,232
=========== ===========
</TABLE>
In July 1998, the Partnership received $116,397 as a settlement from the
Florida Department of Transportation for a right of way taking related to a
parcel of land on its property in Brooksville, Florida. In connection
therewith, the Partnership recognized a gain of $108,176 for financial
reporting purposes.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998, 1997, and 1996, the Partnership recognized $116,089, $128,736 (net
$4,501 in reserves), and $219,757, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,889,012
2000............................................................. 1,919,651
2001............................................................. 2,017,044
2002............................................................. 2,065,510
2003............................................................. 2,096,121
Thereafter....................................................... 12,027,545
-----------
$22,014,883
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
F-14
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Minimum lease payments receivable................. $14,095,756 $ 18,939,788
Estimated residual values......................... 2,457,619 3,040,615
Less unearned income.............................. (8,750,590) (11,935,428)
----------- ------------
Net investment in direct financing leases......... $ 7,802,785 $ 10,044,975
=========== ============
</TABLE>
In August 1998, four of the Partnership's leases were amended. As a result,
the Partnership reclassified these leases from direct financing leases to
operating leases. In accordance with the Statement of Financial Accounting
Standards #13, "Accounting for Leases," the Partnership recorded each of the
reclassified leases at the lower of original cost, present fair value, or
present carrying value. No losses on the termination of direct financing leases
were recorded for financial reporting purposes.
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,106,822
2000............................................................. 1,106,822
2001............................................................. 1,130,328
2002............................................................. 1,142,042
2003............................................................. 1,142,042
Thereafter....................................................... 8,467,700
-----------
$14,095,756
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
F-15
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
5. Investment in Joint Ventures:
The Partnership has an 85.54%, a 36.8%, and a 12.46% interest in the profits
and losses of Asheville Joint Venture, CNL Restaurant Investments II, and
Middleburg Joint Venture, respectively. The remaining interests in these joint
ventures are held by affiliates of the Partnership which have the same general
partners.
Asheville Joint Venture and Middleburg Joint Venture each own and lease one
property, and CNL Restaurant Investments II owns and leases six properties to
an operator of national fast-food or family-style restaurants. The following
presents the joint ventures' combined, condensed financial information at
December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................... $6,320,059 $6,487,210
Net investment in direct financing lease............ 1,319,045 1,335,223
Cash................................................ 1,176 596
Receivables......................................... 17,395 14,169
Prepaid expenses.................................... 719 1,017
Accrued rental income............................... 162,857 128,993
Liabilities......................................... 580 864
Partners' capital................................... 7,820,671 7,966,344
Revenues............................................ 940,168 1,001,284
Net income.......................................... 762,579 824,576
</TABLE>
The Partnership recognized income totalling $276,721, $293,480, and $266,500
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
6. Mortgage Notes Receivable:
As of December 31, 1995, the Partnership had accepted two promissory notes
in the principal sum totalling $460,000, in connection with the sale of two of
its properties in Jacksonville, Florida. The promissory notes, which are
collateralized by mortgages on the properties, bear interest at a rate of ten
percent per annum, and are being collected in 119 equal monthly installments of
$2,106 and $1,931, with balloon payments of $218,252 and $200,324,
respectively, due in December 2005.
In addition, in connection with the sale in 1996 of its property in Orlando,
Florida, the Partnership accepted a promissory note in the principal sum of
$1,388,568, representing the gross sales price of $1,375,000 plus tenant
closing costs of $13,568 that the Partnership financed on behalf of the tenant.
The promissory note bears interest at a rate of 10.75% per annum, is
collateralized by a mortgage on the property and is being collected in 12
monthly installments of interest only, in 24 monthly installments of $15,413
consisting of principal and interest, and thereafter in 144 monthly
installments of $16,220 consisting of principal and interest.
The mortgage notes receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Principal balance..................................... $1,795,920 $1,837,212
Accrued interest receivable........................... 15,806 16,174
---------- ----------
$1,811,726 $1,853,386
========== ==========
</TABLE>
F-16
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The general partners believe that the estimated fair value of mortgage notes
receivable at December 31, 1998 and 1997, approximated the outstanding
principal amount based on estimated current rates at which similar loans would
be made to borrowers with similar credit and for similar maturities.
7. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their 10%
Preferred Return, plus the return of their adjusted capital contributions. The
general partners will then receive, to the extent previously subordinated and
unpaid, a one percent interest in all prior distributions of net cash flow and
a return of their capital contributions. Any remaining sales proceeds will be
distributed 95 percent to the limited partners and five percent to the general
partners. Any gain from the sale of a property not in liquidation of the
Partnership is, in general, allocated in the same manner as net sales proceeds
are distributable. Any loss from the sale of a property is, in general,
allocated first, on a pro rata basis, to partners with positive balances in
their capital accounts; thereafter, 95 percent to the limited partners and five
percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital account balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
declared distributions to the limited partners of $3,850,003, $3,150,003, and
$3,412,500, respectively. No distributions have been made to the general
partners to date.
F-17
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
8. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.............................. $3,288,912 $3,241,567 $3,096,992
Depreciation for tax reporting purposes
in excess of depreciation for
financial reporting purposes.......... (166,412) (204,419) (219,372)
Direct financing leases recorded as
operating leases for tax reporting
purposes.............................. 177,946 178,250 157,197
Allowance for doubtful accounts........ 5,408 18,954 (23,716)
Accrued rental income.................. (116,089) (133,237) (219,757)
Rents paid in advance.................. 9,293 (21,446) 42,637
Gain or loss on sale of land and
buildings for tax reporting purposes
in excess of gain or loss for
financial reporting purposes.......... 3,170 670 99,031
Capitalized transaction costs for tax
reporting purposes.................... 21,042 -- --
Equity in earnings of unconsolidated
joint ventures for tax reporting
purposes in excess of (less than)
equity in earnings of unconsolidated
joint ventures for financial reporting
purposes.............................. 15,563 (2,987) 13,320
Minority interest in timing differences
of consolidated joint venture......... 1,443 1,571 1,677
---------- ---------- ----------
Net income for federal income tax
purposes.............................. $3,240,276 $3,078,923 $2,948,009
========== ========== ==========
</TABLE>
9. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors,
Inc. During the years ended December 31, 1998, 1997, and 1996, CNL Fund
Advisors, Inc. (hereinafter referred to as the "Affiliate") performed certain
services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate an annual, noncumulative, subordinated management fee of
one percent of the sum of gross revenues from properties wholly owned by the
Partnership and the Partnership's allocable share of gross revenues from joint
ventures, but not in excess of competitive fees for comparable services. These
fees will be incurred and will be payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners have not received their 10% Preferred
Return in any particular year, no management fees will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1998, 1997, and 1996.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or
F-18
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
three percent of the sales price if the Affiliate provides a substantial amount
of services in connection with the sale. However, if the net sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. The payment of the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate 10% Preferred Return,
plus their adjusted capital contributions. During the year ended December 31,
1996, the Partnership incurred $41,250 in deferred, subordinated real estate
disposition fees as the result of the sale of the property in Orlando, Florida.
No deferred, subordinated real estate disposition fees were incurred for the
years ended December 31, 1998 and 1997.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $96,202, $80,461 and $89,317 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Due to Affiliates:
Accounting and administrative services.................... $20,216 $ 4,599
Deferred, subordinated real estate disposition fee........ 55,050 55,050
------- -------
$75,266 $59,649
======= =======
</TABLE>
10. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from the unconsolidated joint ventures) for
each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation....................... $728,641 $706,839 $663,889
Restaurant Management Services, Inc. ........... 527,360 531,110 533,990
Carrols Corporation............................. 482,081 523,517 526,034
Flagstar Enterprises, Inc. and Quincy's
Restaurants, Inc. ............................. N/A N/A 356,720
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from the unconsolidated joint
ventures), for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ---------- --------
<S> <C> <C> <C>
Burger King.................................... $961,542 $1,003,419 $989,480
Golden Corral Family Steakhouse Restaurants.... 750,869 735,949 681,042
Shoney's....................................... 603,304 607,054 609,072
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
F-19
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
11. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 4,042,635 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $39,843,631 as
of December 31, 1998.
The APF Shares are expected to be listed for trading on the New York Stock
Exchange concurrently with the consummation of the Merger, and, therefore,
would be freely tradable at the option of the former limited partners. At a
special meeting of the partners that is expected to be held in the third
quarter of 1999, limited partners holding in excess of 50% of the Partnership's
outstanding limited partnership interests must approve the Merger prior to
consummation of the transaction. The general partners intend to recommend that
the limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
12. Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 11 being adjusted to 2,021,318 shares valued at $20.00 per
APF share.
F-20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of the Advisor
and the CNL Restaurant Financial Services Group, and the acquisition of the
Income Fund (the acquisition of the Income Fund is referred to as the
"Acquisition"), and is based on estimates and assumptions set forth below in
the notes to such information which included pro forma adjustments. This
unaudited pro forma financial information has been prepared utilizing the
historical financial statements of APF, the historical combined financial
information of the Income Fund, the Advisor and CNL Restaurant Financial
Services Group (shown separately as CFS and CFC) and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, Income Fund, Advisor and CNL Restaurant Financial Services Group. The
pro forma balance sheet assumes that the Acquisition occurred on 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.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of March 31, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL
Historical Pro Forma Historical Financial
APF Adjustments Subtotal Advisor Services, Inc.
------------ ----------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... 475,787,661 58,749,637 (A) 534,537,298 0 0
Net Investment in Direct
Financing Leases....... 123,270,117 0 123,270,117 0 0
Mortgages and Notes
Receivable............. 41,269,740 0 41,269,740 0 0
Other Investments....... 16,199,792 0 16,199,792 0 0
Investment In Joint
Ventures............... 1,083,564 0 1,083,564 0 0
Cash and Cash
Equivalents............ 35,796,119 (25,093,119)(A) 10,703,000 591,712 552,415
Restricted
Cash/Certificates of
Deposit................ 2,007,278 0 2,007,278 0 0
Receivables (net
allowances)/Due from
Related Party.......... 548,862 0 548,862 7,141,967 5,457,493
Accrued Rental Income... 5,007,334 0 5,007,334 0 0
Other Assets............ 7,723,678 0 7,723,678 490,141 298,498
Goodwill................ 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Assets........... $708,694,145 $33,656,518 $742,350,663 $8,223,820 $6,308,406
============ =========== ============ ========== ==========
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 3,464,190 $ 0 $ 3,464,190 $ 576,531 $ 304,375
Accrued Construction
Costs Payable.......... 10,172,169 0 10,172,169 0 0
Distributions Payable... 0 0 0 119,808 0
Due to Related Parties.. 148,629 0 148,629 0 563,724
Income Tax Payable...... 0 0 0 0 0
Line of Credit/Notes
payable................ 34,150,000 33,656,518 (A) 67,806,518 386,229 0
Deferred Income......... 2,052,530 0 2,052,530 0 0
Rents Paid in Advance... 1,340,636 0 1,340,636 0 0
Minority Interest....... 280,970 0 280,970 0 0
Common Stock............ 373,483 0 373,483 0 0
Common Stock--Class A... 0 0 0 6,400 2,000
Common Stock--Class B... 0 0 0 3,600 724
Additional Paid-in-
capital................ 670,005,177 0 670,005,177 4,617,047 5,303,503
Accumulated
distributions in excess
of net earnings........ (13,293,639) 0 (13,293,639) 2,514,205 134,080
Partners Capital........ 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Liabilities and
Equity................ $708,694,145 $33,656,518 $742,350,663 $8,223,820 $6,308,406
============ =========== ============ ========== ==========
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of March 31, 1999
<TABLE>
<CAPTION>
Historical Historical
CNL Combining CNL Income
Financial Pro Forma Combined Fund Pro Forma Adjusted
Corp. Adjustments APF VIII, Ltd. Adjustments Pro Forma
------------ ------------ -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... 0 0 534,537,298 15,694,231 10,157,967 (B2) 560,389,496
Net Investment in Direct
Financing Leases ...... 0 0 123,270,117 7,762,940 2,591,782 (B2) 133,624,839
Mortgages and Notes
Receivable............. 247,896,287 0 289,166,027 1,526,082 0 290,692,109
Other Investments....... 6,353,482 0 22,553,274 0 0 22,553,274
Investment In Joint
Ventures............... 0 0 1,083,564 2,785,272 1,796,225 (B2) 5,665,061
Cash and Cash
Equivalents............ 4,896,688 (8,055,427)(B1) 8,688,388 1,876,769 (2,647,573)(B2) 7,457,584
(460,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 853,243 0 2,860,521 0 0 2,860,521
Receivables (net
allowances)/Due from
Related Party.......... 1,969,339 (148,629)(C) 14,969,032 1,079 (58,095)(E) 14,912,016
Accrued Rental Income... 0 0 5,007,334 1,950,689 (1,950,689)(B2) 5,007,334
Other Assets............ 2,731,394 (2,792,876)(B1) 8,450,835 64,008 (64,008)(B2) 8,450,835
Goodwill................ 0 42,864,088 (B1) 42,864,088 0 0 42,864,088
------------ ------------ -------------- ----------- ----------- --------------
Total Assets........... $264,700,433 $ 31,867,156 $1,053,450,478 $31,661,070 $ 9,365,609 $1,094,477,157
============ ============ ============== =========== =========== ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 1,613,959 $ 0 $ 5,959,055 $ 72,638 $ 0 $ 6,031,693
Accrued Construction
Costs Payable.......... 0 0 10,172,169 0 0 10,172,169
Distributions Payable... 0 0 119,808 787,501 0 907,309
Due to Related Parties.. 31,310,681 (148,629)(C) 31,874,405 58,095 (58,095)(E) 31,874,405
Income Tax Payable...... 271,741 (271,741)(D) 0 0 0 0
Line of Credit/Notes
payable................ 226,937,481 0 295,130,228 0 0 295,130,228
Deferred Income......... 0 0 2,052,530 0 0 2,052,530
Rents Paid in Advance... 0 0 1,340,636 91,562 0 1,432,198
Minority Interest....... 0 0 280,970 108,625 0 389,595
Common Stock............ 0 61,500 (B1) 434,983 0 19,983 (B2) 454,966
Common Stock--Class A... 200 (8,600)(B1) 0 0 0 0
Common Stock--Class B... 501 (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 3,937,095 122,938,500 (B1) 792,943,677 0 39,946,370 (B2) 832,890,047
(13,857,645)(B1)
Accumulated
distributions in excess
of net earnings........ 628,775 (3,277,060)(B1) (86,857,983) 0 0 (86,857,983)
(73,836,085)(B1)
271,741 (D)
Partners Capital........ 0 0 0 30,542,649 (30,542,649)(B2) 0
------------ ------------ -------------- ----------- ----------- --------------
Total Liabilities and
Equity................ $264,700,433 31,867,156 1,053,450,478 $31,661,070 $ 9,365,609 $1,094,477,157
============ ============ ============== =========== =========== ==============
</TABLE>
F-23
<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
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $12,184,008 $2,339,153(a) $14,523,161 $ 0 $ 0 $ 0
Fees................... 0 0 0 2,307,364 1,391,466 8,137
Interest and Other
Income................ 2,214,763 0 2,214,763 47,213 129,362 5,233,919
----------- ---------- ----------- ---------- ---------- ----------
Total Revenue.......... $14,398,771 $2,339,153 $16,737,924 $2,354,577 $1,520,828 $5,242,056
Expenses:
General and
Administrative
Expenses.............. 1,095,269 0 1,095,269 2,563,714 1,323,577 64,186
Management and Advisory
Fees.................. 697,364 0 697,364 0 0 611,196
Fees Paid to Related
Parties............... 0 0 0 23,326 292,575 0
Interest Expense....... 0 0 0 50,730 0 4,769,268
State Taxes............ 235,208 0 235,208 0 0 0
Depreciation--Other.... 0 0 0 39,581 26,238 0
Depreciation--
Property.............. 1,548,813 349,465(a) 1,898,278 0 0 0
Amortization........... 7,368 0 7,368 0 0 0
Transaction Costs...... 125,926 0 125,926 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
Total Expenses......... 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, 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)
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 17,271 0 17,271 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Provision For Loss on
Properties............ (215,797) 0 (215,797) 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
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)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 127,496 48,017 73,166
----------- ---------- ----------- ---------- ---------- ----------
Net Earnings (Losses)... $10,490,297 $1,989,688 $12,479,985 $ (195,278) $ (73,545) $ (129,428)
=========== ========== =========== ========== ========== ==========
Earnings Per
Share/Unit............. $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ==========
Book Value Per
Share/Unit............. $ 17.59 $ 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
=========== ========== =========== ========== ========== ==========
Ratio of Earnings to
Fixed Charges.......... $ 50.03x $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ==========
Wtd. Avg. Units
Outstanding............ 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
=========== ========== =========== ========== ========== ==========
Shares Outstanding...... 37,348,464 n/a 37,348,464 n/a n/a n/a
=========== ========== =========== ========== ========== ==========
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 Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Combining Historical CNL
Pro Forma Combined Income Fund Pro Forma Adjusted
Adjustments APF VIII, Ltd. Adjustments Pro Forma
----------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ 0 $14,523,161 $ 733,127 44,498(j) $ 15,300,786
Fees................... (2,450,663)(b),(c) 1,256,304 0 (12,934)(k) 1,243,370
Interest and Other
Income................ 62,068 (d) 7,687,325 54,365 0 7,741,690
----------- ----------- ---------- --------- -------------
Total Revenue.......... $(2,388,595) $23,466,790 $ 787,492 $ 31,564 $ 24,285,846
Expenses:
General and
Administrative
Expenses.............. (377,734)(e) 4,669,012 43,381 (23,730)(l),(m) 4,688,663
Management and Advisory
Fees.................. (1,308,560)(f) 0 0 0(n) 0
Fees Paid to Related
Parties............... (292,786)(g) 23,115 0 0 23,115
Interest Expense....... 0 4,819,998 0 0 4,819,998
State Taxes............ 0 235,208 17,534 8,244(o) 260,986
Depreciation--Other.... 0 65,819 0 0 65,819
Depreciation--
Property.............. 0 1,898,278 75,047 44,701(p) 2,018,026
Amortization........... 535,801(h) 543,169 0 0 543,169
Transaction Costs...... 0 125,926 33,563 0 159,489
----------- ----------- ---------- --------- -------------
Total Expenses......... (1,443,279) 12,380,525 169,525 29,215 12,579,265
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties, and
Provision for Losses on
Properties............. $ (945,316) $11,086,265 $ 617,967 $ 2,349 $ 11,706,581
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 0 17,271 56,876 (13,901)(q) 60,246
Gain on Sale of
Properties............ 0 0 0 0 0
Provision For Loss on
Properties............ 0 (215,797) 0 0 (215,797)
----------- ----------- ---------- --------- -------------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... (945,316) 10,887,739 674,843 (11,552) 11,551,030
Benefit/(Provision) for
Federal Income
Taxes................. (248,679)(i) 0 0 0 0
----------- ----------- ---------- --------- -------------
Net Earnings (Losses)... $(1,193,995) $10,887,739 $ 674,843 $ (11,552) $11,551,030 0
=========== =========== ========== ========= =============
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.02 $ n/a $ 0.25
=========== =========== ========== ========= =============
Book Value Per
Share/Unit............. $ n/a $ n/a $ 0.87 $ n/a $ 16.41
=========== =========== ========== ========= =============
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.02 $ n/a $ n/a
=========== =========== ========== ========= =============
Ratio of Earnings to
Fixed Charges.......... $ n/a $ n/a $ n/a $ n/a $ 3.27x
=========== =========== ========== ========= =============
Wtd. Avg. Units
Outstanding............ n/a n/a 35,000,000 n/a n/a
=========== =========== ========== ========= =============
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,401 n/a 1,998,318 45,495,719(r)
=========== =========== ========== ========= =============
Shares Outstanding...... 6,150,000 43,498,464 n/a 1,998,318 45,496,782
=========== =========== ========== ========= =============
Calculation of Pro Forma
Distributions:
Pro Forma Cash from
Operations from
Statement of Cash
Flows................. $ (22,733,096)
Addback Pro Forma
Investments in Notes
Receivable............ 42,571,895
-------------
Adjusted Pro Forma
Distributions Declared: $ 19,838,799(s)
=============
Pro Forma Wtd. Avg.
Dollars Outstanding.... $ 909,914,373(t)
=============
Pro Forma Cash
Distributions Declared
per
$10,000 Investment..... $ 218(u)
=============
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 $21,919,865(a) $55,049,526 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $21,919,865 $64,106,902 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 2,889,368(a) 6,931,658 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 2,889,368 12,298,325 11,435,228 7,966,916 25,677,829
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties, and
Provision for Losses on
Properties............. $32,778,080 $19,030,497 $51,808,577 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Other Expenses......... 0 0 0 0 0 0
Provision For Loss on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
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
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $19,030,497 $51,182,905 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Units
Outstanding............ n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,570,262 34,218,481 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 34,757 37,372,684 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Calculation of Pro Forma
Distributions Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows.............
Addback Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable......
Addback Pro Forma
Investments in Notes
Receivable............
Adjusted Pro Forma
Distributions Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL
Pro Forma Combined Income Fund Pro Forma Adjusted
Adjustments APF VIII, Ltd. Adjustments Pro Forma
------------ ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income............... $ 0 $55,049,526 $3,092,959 177,993 (j) $ 58,320,478
Fees.................. (32,715,768)(b),(c) 3,226,263 0 (30,172)(k) 3,196,091
Interest and Other
Income............... 207,144 (d) 32,221,925 269,744 0 32,491,669
------------ ----------- ---------- --------- -------------
Total Revenue......... $(32,508,624) $90,497,714 $3,362,703 $ 147,821 $ 94,008,238
Expenses:
General and
Administrative....... (4,241,719)(e) 15,939,556 171,780 (78,332)(l),(m) 16,033,004
Management and
Advisory Fees........ (4,658,434)(f) 0 0 0 (n) 0
Fees to Related
Parties.............. (2,161,897)(g) 858,787 0 0 858,787
Interest Expense...... 0 21,498,589 0 0 21,498,589
State Taxes........... 0 567,446 5,372 12,429 (o) 585,247
Depreciation--Other... 0 199,157 0 0 199,157
Depreciation--
Property............. (340,898)(r) 6,590,760 246,976 178,806 (p) 7,016,542
Amortization.......... 2,143,204 (h) 2,307,205 0 0 2,307,205
Transaction Costs..... 0 157,054 21,042 0 178,096
------------ ----------- ---------- --------- -------------
Total Expenses........ (9,259,744) 48,118,554 445,170 112,903 48,676,627
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on
Sale of Properties,
and Provision for
Losses on Properties.. $(23,248,880) $42,379,160 $2,917,533 $ 34,918 $ 45,331,611
Equity in Earnings of
Joint
Venture/Minority
Interest............. 0 (14,138) 263,203 (55,604)(q) 193,461
Gain on Sale of
Properties........... 0 0 108,176 0 108,176
Gain on
Securitization....... 0 3,694,351 0 0 3,694,351
Other Expenses........ 0 0 0 0 0
Provision For Loss on
Properties........... 0 (611,534) 0 0 (611,534)
------------ ----------- ---------- --------- -------------
Net Earnings (Losses)
Before Benefit/
(Provision) for
Federal Income Taxes.. (23,248,880) 45,447,839 3,288,912 (20,686) 48,716,065
Benefit/(Provision)
for Federal Income
Taxes................ 6,898,434 (i) 0 0 0 0
------------ ----------- ---------- --------- -------------
Net Earnings (Losses).. $(16,350,446) $45,447,839 $3,288,912 $ (20,686) $48,716,065 0
============ =========== ========== ========= =============
Earnings Per
Share/Unit............ $ n/a $ n/a $ 0.09 $ n/a $ 1.15
============ =========== ========== ========= =============
Book Value Per
Share/Unit............ $ n/a $ n/a $ 0.88 $ n/a $ 16.45
============ =========== ========== ========= =============
Dividends Per
Share/Unit............ $ n/a $ n/a $ 0.10 $ n/a $ n/a
============ =========== ========== ========= =============
Ratio of Earnings to
Fixed Charges......... n/a n/a n/a n/a 3.21x
============ =========== ========== ========= =============
Wtd. Avg. Units
Outstanding........... n/a n/a 35,000,000 n/a n/a
============ =========== ========== ========= =============
Wtd. Avg. Shares
Outstanding........... 6,150,000 40,368,481 n/a 1,998,318 42,366,799 (s)
============ =========== ========== ========= =============
Shares Outstanding..... 6,150,000 43,522,684 n/a 1,998,318 45,521,002
============ =========== ========== ========= =============
Calculation of Pro Forma
Distributions
Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows............ $ 59,198,688
Addback Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable..... (265,871,668)
Addback Pro Forma
Investments in Notes
Receivable........... 288,590,674
-------------
Adjusted Pro Forma Distributions
Declared: $ 81,917,694 (t)
=============
Pro Forma Wtd. Avg.
Dollars Outstanding... $ 847,335,981 (u)
=============
Pro Forma Cash
Distributions Declared
per $10,000 Investment
$10,000 Investment.... $ 967 (v)
=============
</TABLE>
F-27
<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 Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 10,490,297 $ 1,989,688 (a) $ 12,479,985 $ (195,278) $ (73,545) $ (129,428)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 1,548,813 349,465 (b) 1,898,278 39,581 0 0
Amortization expense... 7,368 0 7,368 0 26,238 424,697
Minority interest in
income of consolidated
joint venture......... 7,763 0 7,763 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 23,234 0 23,234 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 215,797 0 215,797 0 0 (73,166)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (82,660) 0 (82,660) (377,933) (242,251) (6,771)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (449,580)
Investment in notes
receivable............ 0 0 0 0 0 (42,571,895)
Collections on notes
receivable............ 0 0 0 0 0 6,417,907
Increase in restricted
cash.................. 0 0 0 0 0 (402,461)
Decrease in due from
related party......... 0 0 0 0 0 55,382
Decrease (increase) in
prepaid expenses...... 27,548 0 27,548 0 1,811 0
Decrease in net
investment in direct
financing leases...... 787,375 0 787,375 0 0 0
Increase in accrued
rental income......... (1,047,421) 0 (1,047,421) 0 0 0
Decrease (increase) in
intangibles and other
assets................ (30,554) 7,942
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 306,277 0 306,277 (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 0 71,853 25,550 0 0
Decrease in accrued
interest.............. 0 0 0 0 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 386,365 0 386,365 0 0 0
Increase (decrease) in
deferred rental
income................ 862,647 0 862,647 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Total adjustments...... 3,114,959 349,465 3,464,424 (1,183,414) (344,708) (37,064,802)
------------- ------------ ------------- ----------- --------- ------------
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)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 0 0 0 0
Additions to land and
buildings on operating
leases................ (77,028,830) (58,749,637)(e) (135,778,467) (31,577) (10,092) 0
Investment in direct
financing leases...... (29,608,346) 0 (29,608,346) 0 0 0
Investment in joint
venture............... (117,662) 0 (117,662) 0 0 0
Aqcuisition of
businesses............
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 134,981
Investment in mortgage
notes receivable...... (1,388,463) 0 (1,388,463) 0 0 0
Collections on mortgage
note receivable....... 75,010 0 75,010 0 0 0
Investment in notes
receivable............ (1,087,483) 0 (1,087,483) 0 0 0
Collection on notes
receivable............ 239,596 0 239,596 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... 0 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) investing
activities............ (108,916,178) (58,749,637) (167,665,815) (31,577) (10,092) 134,981
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,735 0 210,735 1,288,673 20,572 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,142,237) 0 (1,142,237) 0 0 0
Payment of stock
issuance costs........ (722,001) 0 (722,001) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 36,587,245 33,656,518 (e) 70,243,763 0 0 49,730,934
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (2,385) (10,291,473)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (8,610) 0 (8,610) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0 0
Distributions to
stockholders.......... (14,237,405) 0 (14,237,405) 0 0 0
Other.................. (200,234) 0 (200,234) 0 0 (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
Cash at beginning of
year................... 123,199,837 0 123,199,837 713,308 962,573 2,526,078
------------- ------------ ------------- ----------- --------- ------------
Cash at end of year..... $ 35,796,119 $(22,753,966) $ 13,042,153 $ 591,712 $ 552,415 $ 4,896,688
============= ============ ============= =========== ========= ============
</TABLE>
F-28
<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>
Historical
Combining CNL
Pro Forma Income Fund Pro Forma Adjusted
Adjustments Combined APF VIII Ltd. Adjustments Pro Forma
----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(1,193,995)(a) $ 10,887,739 $ 674,843 $ (11,552)(a) $ 11,551,030
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 0 1,937,859 75,047 44,701 (b) 2,057,607
Amortization expense... 535,801 (c) 994,104 0 0 994,104
Minority interest in
income of consolidated
joint venture......... 0 7,763 3,355 0 11,118
Equity in earnings of
joint ventures, net of
distributions......... 0 23,234 24,487 13,901 (d) 61,622
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 0 142,631 0 0 142,631
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (709,615) 85,302 0 (624,313)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (449,580) 0 0 (449,580)
Investment in notes
receivable............ 0 (42,571,895) 0 0 (42,571,895)
Collections on notes
receivable............ 0 6,417,907 0 0 6,417,907
Increase in restricted
cash.................. 0 (402,461) 0 0 (402,461)
Decrease in due from
related party......... 0 55,382 0 0 55,382
Decrease (increase) in
prepaid expenses...... 0 29,359 (7,378) 0 21,981
Decrease in net
investment in direct
financing leases...... 0 787,375 39,845 0 827,220
Increase in accrued
rental income......... 0 (1,047,421) (23,271) 0 (1,070,692)
Decrease (increase) in
intangibles and other
assets................ (22,612) 0 0 (22,612)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (768,267) 40,542 0 (727,725)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 97,403 (17,171) 0 80,232
Decrease in accrued
interest.............. 0 (362,877) 0 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 0 386,365 29,213 0 415,578
Increase (decrease) in
deferred rental
income................ 0 862,647 0 0 862,647
----------- ------------- ----------- ----------- -------------
Total adjustments...... 535,801 (34,592,699) 249,971 58,602 (34,284,126)
----------- ------------- ----------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (658,194) (23,704,960) 924,814 47,050 (22,733,096)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 0 0 0
Additions to land and
buildings on operating
leases................ (135,820,136) 0 (135,820,136)
Investment in direct
financing leases...... 0 (29,608,346) 0 0 (29,608,346)
Investment in joint
venture............... 0 (117,662) 0 0 (117,662)
Aqcuisition of
businesses............ (8,055,427)(f) (8,055,427) (2,647,573)(g) (11,163,000)
(460,000)(g)
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 134,981 0 0 134,981
Investment in mortgage
notes receivable...... 0 (1,388,463) 0 0 (1,388,463)
Collections on mortgage
note receivable....... 0 75,010 283,528 0 358,538
Investment in notes
receivable............ 0 (1,087,483) 0 0 (1,087,483)
Collection on notes
receivable............ 0 239,596 0 0 239,596
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 0 0 0
----------- ------------- ----------- ----------- -------------
Net cash provided by
(used in) investing
activities............ (8,055,427) (175,627,930) 283,528 (3,107,573) (178,451,975)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 1,519,980 0 0 1,519,980
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,142,237) 0 0 (1,142,237)
Payment of stock
issuance costs........ 0 (722,001) 0 0 (722,001)
Proceeds from borrowing
on line of
credit/notes payable.. 0 119,974,697 0 0 119,974,697
Payment on line of
credit/notes payable.. 0 (22,874,147) 0 0 (22,874,147)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (8,610) (3,330) 0 (11,940)
Distributions to
limited partners...... 0 0 (1,137,501) 0 (1,137,501)
Distributions to
stockholders.......... 0 (14,237,405) 0 0 (14,237,405)
Other.................. 0 (209,836) 0 0 (209,836)
----------- ------------- ----------- ----------- -------------
Net cash provided by
(used in) financing
activities............ 0 82,300,441 (1,140,831) 0 81,159,610
Net increase in cash.... (8,713,621) (117,032,449) 67,511 (3,060,523) (120,025,461)
Cash at beginning of
year................... 0 127,401,796 1,809,258 0 129,211,054
----------- ------------- ----------- ----------- -------------
Cash at end of year..... (8,713,621) 10,369,347 1,876,769 (3,060,523) 9,185,593
=========== ============= =========== =========== =============
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------- ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income(loss)........ $ 32,152,408 $ 19,030,497 (a) $ 51,182,905 $10,656,379 $(468,133) $ 427,134
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 4,042,290 2,889,368 (b) 6,931,658 119,923 79,234 0
Amortization expense... 11,808 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
leases................ 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) (2,187,652) 0 0 0
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 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 693,372 0 0 0
------------- ------------- ------------- ----------- ---------- -------------
Total adjustments...... 6,963,867 2,889,368 9,853,235 (3,608,563) 316,963 1,610,591
------------- ------------- ------------- ----------- ---------- -------------
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
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (58,749,637)(e) (258,851,304) (381,671) (236,372) 0
Investment in direct
financing leases...... (47,115,435) (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) (974,696) 0 0 0
Acquisition of
businesses............
Purchase of other
investments........... (16,083,055) (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) (6,281,069) 0 0 0
Other.................. 0 0 200,000 0 0
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) investing
activities............ (277,338,756) (58,749,637) (336,088,393) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0
0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 33,656,518 (e) 41,348,558 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) (34,073) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0
Distributions to
stockholders.......... (39,449,149) (39,449,149) (9,364,488) 0 0
Other.................. (95,101) (95,101) 0 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
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
============= ============= ============= =========== ========== =============
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL Income
Pro Forma Combined Funds Pro Forma Adjusted
Adjustments APF VIII, Ltd. Adjustments Pro Forma
------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income(loss)........ $(16,350,446)(a) $ 45,447,839 $3,288,912 $ (20,686)(a) $ 48,716,065
Adjustments to reconcile
net income (loss) to
net cash provided
by(used in) operating
activities:
Depreciation........... (340,898)(b) 6,789,917 246,976 178,806 (b) 7,215,699
Amortization expense... 2,143,204 (c) 4,457,288 0 4,457,288
Minority interest in
income of consolidated
joint venture......... 0 30,156 13,518 43,674
Equity in earnings of
joint ventures, net of
distributions......... 0 (15,440) 67,922 55,604 (d) 108,086
Loss(gain) on sale of
land, building, net
investment in direct
leases................ 0 (108,176) (108,176)
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 1,009,576 0 1,009,576
Gain on
securitization........ (3,356,538) 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 265,871,668 0 265,871,668
Decrease(increase) in
other receivables..... (2,543,413) (32,504) (2,575,917)
Increase in accrued
interest income
included in notes
receivable............ (170,492) 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0
Investment in notes
receivable............ (288,590,674) 0 (288,590,674)
Collections on notes
receivable............ 23,539,641 0 23,539,641
Decrease in restricted
cash.................. 2,504,091 0 2,504,091
Decrease(increase) in
due from related
party................. (953,688) 0 (953,688)
Increase in prepaid
expenses.............. 7,246 398 7,644
Decrease in net
investment in direct
financing leases...... 1,971,634 177,947 2,149,581
Increase in accrued
rental income......... (2,187,652) (116,089) (2,303,741)
Increase in intangibles
and other assets...... (154,351) 0 (154,351)
Increase(decrease) in
accounts payable,
accrued expenses and
other liabilities..... 846,680 (722) 845,958
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. (133,364) 15,617 (117,747)
Increase in accrued
interest.............. (77,968) 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 8,793 445,636
Decrease in deferred
rental income......... 693,372 0 693,372
------------ ------------ ---------- ----------- ------------
Total adjustments...... 1,802,306 9,974,532 273,680 234,410 10,482,622
------------ ------------ ---------- ----------- ------------
Net cash provided by
(used in) operating
activities............ (14,548,140) 55,422,371 3,562,592 213,724 59,198,687
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 116,397 2,502,338
Additions to land and
buildings on operating
leases................ (259,469,347) 0 (259,469,347)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435)
Investment in joint
venture............... (974,696) 0 (974,696)
Acquisition of
businesses............ (8,055,427)(f) (8,055,427) 0 (2,647,573)(g) (11,163,000)
0 (460,000)(g)
Purchase of other
investments........... (16,083,055) 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 295,514 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 212,821 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648)
Collections on mortgage
note receivable....... 291,990 41,292 333,282
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750)
Collections on
equipment notes
receivable............ 3,046,873 0 3,046,873
Decrease in restricted
cash.................. 0 0 0
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069)
Other.................. 200,000 36 200,036
------------ ------------ ---------- ----------- ------------
Net cash provided
by(used in) investing
activities............ (8,055,427) (342,270,288) 157,725 (3,107,573) (345,220,136)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 386,592,011 0 386,592,011
Contributions from
limited partners...... 0 0 0
0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925)
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 455,102,478 0 455,102,478
Payment on line of
credit/notes payable.. (411,813,826) 0 (411,813,826)
Retirement of shares of
common stock.......... (639,528) 0 (639,528)
Distributions to
holders of minority
interest.............. (34,073) (13,292) (47,365)
Distributions to
limited partners...... 0 (3,500,003) (3,500,003)
Distributions to
stockholders.......... (48,813,637) 0 (48,813,637)
Other.................. (2,595,088) 0 (2,595,088)
------------ ------------ ---------- ----------- ------------
Net cash provided by
(used in) financing
activities............ 0 338,643,762 (3,513,295) 0 335,130,467
Net increase(decrease)
in cash................ (22,603,567) 51,795,845 207,022 (2,893,849) 49,109,018
Cash at beginning of
year................... 49,829,130 1,602,236 51,431,366
------------ ------------ ---------- ----------- ------------
Cash at end of year..... (22,603,567) 101,624,975 $1,809,258 $(2,893,849) $100,540,384
============ ============ ========== =========== ============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of 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 Income Fund. This unaudited pro forma financial
information has been prepared utilizing the historical financial statements of
APF and the historical combined financial information of the Advisor, CNL
Restaurant Financial Services Group and the Income Fund and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, the Advisor the CNL Restaurant Financial Services Group and the Income
Fund. The Pro Forma Balance Sheet was prepared as if the transactions described
above occurred on 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 Fund 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 Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
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
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
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.
(B) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Funds Total
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Shares Offered.......... 3,800,000 2,350,000 1,998,317.65 8,148,317.65
Exchange Value.......... $ 20 $ 20 $ 20 $ 20
----------- ----------- ------------- ------------
Share Consideration..... $76,000,000 $47,000,000 $ 39,966,353 $162,966,353
Cash Consideration...... -- -- 460,000 460,000
APF Transaction Costs... 4,977,337 3,078,090 2,647,573 10,703,000
----------- ----------- ------------- ------------
Total Purchase Price.... $80,977,337 $50,078,090 $ 43,073,926 $174,129,353
=========== =========== ============= ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 7,141,252 $10,006,878 $ 30,542,649 $ 47,690,779
Purchase Price Adjust-
ments:
Land and buildings on
operating leases..... 10,157,967 10,157,967
Net investment in
direct financing
leases............... 2,591,782 2,591,782
Investment in joint
ventures............. 1,796,225 1,796,225
Accrued rental
income............... (1,950,689) (1,950,689)
Intangibles and other
assets............... (2,792,876) (64,008) (2,856,884)
Goodwill*............. 42,864,088 -- 42,864,088
Excess purchase
price................ 73,836,085 -- -- 73,836,085
----------- ----------- ------------- ------------
Total Allocation.... $80,977,337 $50,078,090 $ 43,073,926 $174,129,353
=========== =========== ============= ============
</TABLE>
--------
* Goodwill represents the portion of the purchase price which is assumed
to relate to the ongoing value of the debt business.
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $10,703,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of
the Advisor, CNL Financial Services Group and the Income Fund. The
excess purchase price paid for the Advisor to a related party of
$73,836,085 was expensed at March 31, 1999 because the Advisor has not
been deemed to qualify as a "business" for purposes of applying APB
Opinion No. 16, "Business Combinations". Goodwill of 42,864,088
relating to the acquisition of the CNL Financial Services Group is
being amortized over 20 years. APF did not acquire any intangibles as
part of any of the acquisitions. The entries were as follows:
<TABLE>
<S> <C> <C>
1. Common Stock
(CFA, CFS,
CFC)--Class
A............. 8,600
Common Stock
(CFA,
CFS,
CFC)--
Class
B....... 4,825
APIC (CFA, CFS,
CFC).... 13,857,645
Retained
Earnings.. 3,277,060
Accumulated
distributions
in
excess
of
earnings.. 73,836,085
Goodwill for
CFC
(Intangibles
and
other
assets).. 42,864,088
CFC/CFS Org
Costs/Other
Assets...... 2,792,876
Cash to pay
APF transac-
tion costs.. 8,055,427
APF Common
Stock....... 61,500
APF APIC..... 122,938,500
(To record
acquisition
of CFA,
CFS and
CFC)
2.Partners Capi-
tal............. 30,542,649
Land and
buildings
on
operating
leases.. 10,157,967
Net investment
in
direct
financing
leases.. 2,591,782
Investment in
joint
ventures.. 1,796,225
Accrued
rental
income.. 1,950,689
Intangibles
and other
assets...... 64,008
Cash to pay
APF Transac-
tion costs.. 2,647,573
Cash consid-
eration to
Income
Funds....... 460,000
APF Common
Stock....... 19,983
APF APIC..... 39,946,370
(To record
acquisition
of
Income
Fund)
</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 Income Fund of $58,095 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, 1999.
(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.
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates............................. $(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 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
</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>
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $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)
<TABLE>
<S> <C>
Amortization of goodwill........................................ $535,801
</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 $44,498 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<S> <C>
Management fees................................................ $ 0
Reimbursement of administrative costs.......................... (12,934)
--------
$(12,934)
========
</TABLE>
(l) Represents the elimination of $12,934 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $10,796 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax
reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $8,244 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through May 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 Fund 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 $44,701 as a result
of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated
using the straight-line method over the remaining useful lives of the
properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense of
$13,901 as a result of adjusting the historical basis of the real
estate owned by the Income Fund, indirectly through joint venture or
tenancy in common arrangements, to fair value as a result of
accounting for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings owned
indirectly by the Income Fund is being depreciated using the
straight-line method over the remaining useful lives of the
properties.
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 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.
(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
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates.......................... $ (1,773,406)
Secured equipment lease fees.............................. (54,998)
Advisory fees............................................. (305,030)
Reimbursement of administrative costs..................... (408,762)
Acquisition fees.......................................... (21,794,386)
Underwriting fees......................................... (388,491)
Administrative, executive and guarantee fees.............. (1,233,043)
Servicing fees............................................ (1,570,331)
Development fees.......................................... (229,153)
Management fees........................................... (1,851,004)
------------
Total................................................... $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term of
the loans originated in accordance with generally accepted accounting
principles. Total loan origination fees received by CNL Financial
Services, Inc. during the year ended December 31, 1998 of $3,107,164
are being deferred for pro forma purposes and are being amortized
over the terms of the underlying loans (15 years).
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the year ended
December 31, 1998, which were deferred for pro forma purposes as
described in 5(II)(c). These deferred loan origination fees are being
amortized and recorded as interest income over the terms of the
underlying loans (15 years).
<TABLE>
<S> <C>
Interest income.................................................. $207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF to
the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during the
period under development.
<TABLE>
<S> <C>
General and administrative costs............................ $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,851,004)
Administrative executive and guarantee fees................ (1,233,043)
Servicing fees............................................. (1,269,357)
Advisory fees.............................................. (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(g) Represents the elimination of $2,161,897 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from
agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4)
<TABLE>
<S> <C>
Amortization of goodwill...................................... $2,143,204
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure
that exists within APF. APF expects to continue to qualify as a REIT
and does not expect to incur federal income taxes.
(j) Represents $177,993 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<S> <C>
Management fees............................................... $ 0
Reimbursement of administrative costs......................... (30,172)
--------
$(30,172)
========
</TABLE>
(l) Represents the elimination of $30,172 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $48,160 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax
reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(o) Represents additional state income taxes of $12,429 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 Fund had been issued as of January 1, 1998 and
that these entities had operated under a REIT structure as of January
1, 1998.
(p) Represents an increase in depreciation expense of $178,806 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Income Fund through joint venture or tenancy in
common arrangements with affiliates or unrelated third parties, to
fair value as a result by the Income Fund to fair value as a result
of accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense of
$55,604 as a result of adjusting the historical basis of the real
estate owned by the Income Fund, indirectly through joint venture or
tenancy in common arrangements, to fair value as a result of
accounting for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings owned
indirectly by the Income Fund is being depreciated using the
straight-line method over the remaining useful lives of the
properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF and
the Advisor which on a historical basis were capitalized as part of
the basis of the building.
(s) Common shares issued during the period required to fund acquisitions
as if they had been acquired on January 1, 1998 were assumed to have
been issued and outstanding as of January 1, 1998. For purposes of
the pro forma financial statements, it is assumed that the
stockholders approved a reverse stock split proposal and a proposal
to increase the number of authorized common shares of APF on January
1, 1998.
(t) 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 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.
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(e) Represents the 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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non-Cash Investing Activities
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B)
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net income.
(c) Represents add back of pro forma amortization of goodwill expenses to
net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the use of amounts borrowed under APF's credit facility
and the use of cash to 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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
F-40
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund VIII, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund VIII, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
A-1
<PAGE>
(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
A-2
<PAGE>
Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
A-3
<PAGE>
Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among by and among CNL American Properties Fund,
Inc., a Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware
limited partnership (the "Operating Partnership"), CNL APF GP corp., a Delaware
corporation (the "OP General Partner"), CNL Income Fund VIII, Ltd., a Florida
limited partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr.,
and CNL Realty Corporation, a Florida corporation (together with Messrs. Borne
and Seneff, the "General Partners"). APF, the Operating Partnership, the OP
General Partner, the Fund and the General Partners are referred to collectively
herein as the "Parties" and individually as a "Party."
Recitals:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund will
be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
Agreement:
1. Amendments to Merger Agreement
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its
entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote
against the Merger and affirmatively elect the note option, such
limited partners shall be entitled to receive, in lieu of the Share
Consideration, notes (the "Notes") in the aggregate amount equal to 97%
of the value (based on the Exchange Value as defined in the
Registration Statement) of the Share Consideration such Dissenting
Partners would have otherwise received had such partners not elected to
receive the Notes (the "Note Option"). The Notes will mature on the
fifth anniversary of the Closing Date and will bear interest at a fixed
rate equal to seven percent. The aggregate Share Consideration shall be
reduced on a one-for-basis for all APF Shares otherwise distributable
to Dissenting Partners had such Dissenting Partners not elected the
Note Option."
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to Dissenting
Limited Partners shall not have exceeded 15% of the value of the Share
Consideration based on the Exchange Value."
B-1
<PAGE>
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. General
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will
constitute one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of
Florida or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Florida.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
By: /s/ James M. Seneff, Jr.
Its: Chairman and 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 VII, 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
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<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund VIII, Ltd., a Florida limited
partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL
Realty Corporation, a Florida corporation (together with Messrs. Bourne and
Seneff, the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
Recitals:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
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"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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<PAGE>
"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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<PAGE>
"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
B-7
<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 4,042,635 fully paid and nonassessable APF Common
Shares (2,021,318 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $37,070,274, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 56,957,365 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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<PAGE>
APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 35,000,000 units of limited partnership interests. All of
the outstanding Fund Interests have been duly authorized, are validly issued,
fully paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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<PAGE>
will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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<PAGE>
(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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<PAGE>
from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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<PAGE>
Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $4,042,635 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $404,264 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
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 VIII, 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
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<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND IX, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund IX, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly-owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999, and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds) that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties on a triple-net
basis, APF has the ability to offer a complete range of restaurant property
services to operators of national and regional restaurant chains, from triple-
net leasing and mortgage financing to site selection, construction management
and build-to-suit development. If APF acquires all of the Income Funds in the
Acquisition, APF expects to have total assets of approximately $1.5 billion at
the time of the consummation of the Acquisition and will be one of the largest
triple-net lease REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 1,850,049 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is uncertain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for trading on
the NYSE. We do not know the value at which an APF Share will trade on the NYSE
upon listing.
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It is possible that the APF Shares will trade at prices substantially below the
exchange value. APF has, however, recently sold $750 million of APF Shares
through three public offerings. In each offering, the offering price per APF
Share, after giving effect to the one-for-two stock split, equaled the exchange
value. The offering price was determined by APF based upon the estimated costs
of investing in restaurant properties and making mortgage loans, the fees to be
paid to CNL Fund Advisors, Inc. and its affiliates, as well as fees to third
parties and the expenses of the offerings. At March 31, 1999, APF has invested
all of the net offering proceeds to acquire restaurant properties, to make
mortgage loans and to pay fees and other expenses.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the Acquisition?
There are a number of material risks and considerations that you should
consider, including:
. We are uncertain as to the value at which APF Shares will trade
following listing.
. We have material conflicts in light of our being both general partners
of the Income Funds and members of APF's Board of Directors.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. As stated below, the Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's limited partners will be binding on you even if you vote against the
Acquisition.
Did you receive a fairness opinion in connection with APF's acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
with respect to the fairness, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the colored
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's acquisition of your
Income Fund. If you prefer, you may instead vote by telephone, following the
instructions on your consent form. If you sign and send in your consent form
and do not indicate how you want to vote, your consent form will be counted as
a vote "For" the Acquisition. If you do not vote or you abstain from voting, it
will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2004 in an amount equal to 97% of your portion of the APF Share consideration,
based on the
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exchange value, that would otherwise have been paid to your Income Fund. Please
note that you may only receive the notes if you vote "Against" the Acquisition
and you elect to receive notes on your consent form. You will receive APF
Shares if your Income Fund elects to be acquired in the Acquisition and you
vote "For" the Acquisition, or you vote "Against" the Acquisition and do not
affirmatively select the notes option on your consent form. In addition, if
Limited Partners in your Income Fund elect to receive notes in an amount
greater than 15% of the estimated value of APF Shares, based on the exchange
value, to be paid to your Income Fund, then APF has the right to decline to
acquire your Income Fund. The notes will not be listed on any exchange or
automated quotation system, and a market for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
the tax that you must pay will generally be based on the difference between the
value of the APF Shares you receive and the tax basis of your units. If you
elect to receive notes, your tax will be based upon your allocable share of the
gain which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Some of
the gain may be subject to the 25% rate of tax applicable to certain types of
real property gain.
We urge you to consult with your tax advisor to evaluate the taxes that will be
incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $1,786. To
review the tax consequences to the Limited Partners of the Income Funds in
greater detail, see pages 180 through 194 of the consent solicitation and
"Federal Income Tax Considerations" in this supplement.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds acquired by
APF may be differently constructed, located in a different geographic area or
of a different restaurant chain than the restaurant properties owned by your
Income Fund. Because the market for real estate may vary from one region of the
country to another, the change in geographic diversity may expose you to
different and greater risks than those to which you are presently exposed. For
geographic information regarding APF's and the Income Funds' restaurant
properties, see "APF's Business and The Restaurant Properties--Business
Objectives and Strategies" and "--The Restaurant Properties--General" and
"Business of the Income Funds--Description of Restaurant Properties" in the
consent solicitation.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund. This description is qualified in its entirety
by the more detailed discussion in the section entitled "Risk Factors"
contained in the consent solicitation.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease below the exchange value upon listing.
Your Income Fund will be receiving 1,850,049 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices substantially below
the exchange value or the historical per share book value of the assets of APF.
The APF Shares have been approved for listing on the NYSE, subject to official
notice of issuance. Prior to listing, the
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existing APF stockholders have not had an active trading market in which they
could sell their APF Shares. Additionally, any Limited Partners of the Income
Funds who become APF stockholders as a result of the Acquisition, will have
transformed their investment in non-tradable units into an investment in freely
tradable APF Shares. Consequently, some of these stockholders may choose to
sell their APF Shares upon listing at a time when demand for APF Shares may be
relatively low. The market price of the APF Shares may be volatile after the
Acquisition, and the APF Shares could trade at prices substantially less than
the exchange value as a result of increased selling activity following the
issuance of the APF Shares, the interest level of investors in purchasing the
APF Shares after the Acquisition and the amount of distributions to be paid by
APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund made $910, $920 and $900, respectively, in distributions, per $10,000
investment to you. While historically, APF has made distributions equal to
7.625% per APF Share, based on the exchange value, we cannot be sure that APF
will be able to maintain this level of distributions in the future. In the
event that APF is unable to maintain this level of distributions in the future,
your distributions per $10,000 investment may decrease substantially after the
Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have three material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne have a different interest in the completion of the Acquisition which
may conflict with your interest as a Limited Partner of the Income Fund or with
their own positions as the general partners of your Income Fund. Second,
assuming only your Income Fund is acquired in the Acquisition, we will receive
16,817 APF Shares. Finally, in the event that your Income Fund is not acquired,
however, we, as general partners of your Income Fund, may be required to pay
all or a substantial portion of the Acquisition costs allocated to your Income
Fund to the extent that you or other Limited Partners of your Income Fund vote
against the Acquisition. For additional information regarding the Acquisition
costs allocated to your Income Fund, see "Comparison of Alternative Effect on
Financial Condition and Results of Operations" contained in this supplement.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own and lease on a triple-net basis, on the date that the Acquisition
is consummated, assuming only your Income Fund was acquired as of March 31,
1999, 553 restaurant properties. The risks inherent in investing in an
operating company such as APF include that APF may invest in new restaurant
properties that are not as profitable as APF anticipated, may incur substantial
indebtedness to make future acquisitions of restaurant properties which it may
be unable to repay and may make mortgage loans to prospective operators of
national and regional restaurant chains which may not have the ability to
repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the
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value of your investment only through sale of your APF Shares, not from
liquidation proceeds, if any from restaurant properties. Continuation of your
Income Fund would, on the other hand, permit you eventually to receive
liquidation proceeds from the sale of the Income Fund's restaurant properties,
and your share of these sale proceeds could be higher than the amount realized
from the sale of your APF Shares or from the combination of cash paid to and
payments on any notes if you elect the notes.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default 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. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
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In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
March 31, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.62x and its ratio of debt-to-total assets was
28.02%. If only your Income Fund were acquired as of that date, APF's debt
service ratio would have been 3.76x and its ratio of debt-to-total assets would
have been 27.05%. Up through the time immediately prior to the consummation of
the Acquisition, as a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former Limited Partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgages. APF
typically does not require that a third party guarantee the obligations of the
tenant or the borrower. The ability of the tenants or borrowers to pay their
obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to: (1)
national, regional and local economic conditions which may be adversely
affected by industry slowdowns, employer relocations, prevailing employment
conditions and other factors, and which may reduce consumer demand for the
products offered by APF's customers; (2) local real estate conditions; (3)
changes or weaknesses in specific industry segments; (4) perceptions by
prospective customers of the safety, convenience, services and attractiveness
of the restaurant chain; (5) changes in demographics, consumer tastes and
traffic patterns; (6) the ability to obtain and retain capable management; (7)
changes in laws, building codes, similar ordinances and other legal
requirements, including laws increasing the potential liability for
environmental conditions existing on properties; (8) the inability of a
particular restaurant chain's computer system, or that of its franchisor or
vendors, to adequately address Year 2000 issues; (9) increases in operating
expenses; and (10) increases in minimum wages, taxes, including income,
service, real estate and other taxes, or mandatory employee benefits.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
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If APF fails to qualify as a REIT, it would be subject to federal income
tax at regular corporate rates. In addition to these taxes, APF may be subject
to federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as a stockholder, would be reduced substantially for
each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to certain adjustments that are unique to REITs, a REIT generally
must distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the tax
laws that are currently in effect. We are unable to predict any future changes
in the tax laws that would adversely affect APF's status as a REIT. In the
event that there is a change in the tax laws that prevents APF from qualifying
as a REIT or that requires REITs generally to pay corporate level federal
income taxes, APF may not be able to make the same level of distributions to
its stockholders. In addition, such change may limit APF's ability to invest in
additional restaurant properties and to make additional mortgage loans.
For a more detailed discussion of the risks associated with the Acquisition,
see "Risk Factors" in the consent solicitation.
CONSIDERATION PAID TO INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth information regarding the estimated value of
the consideration that your Income Fund will receive in the Acquisition. The
APF Shares payable to your Income Fund will not change if APF acquires fewer
than all of the Income Funds in the Acquisition. This data assumes that none of
the Limited Partners of your Income Fund have elected to receive notes. You
should note that the APF Shares may trade at prices substantially below the
exchange value upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited
Partner
Original Investments
Limited Less any
Partner Distributions of Number of Estimated Estimated Value
Investments Net Sales APF Value of of APF Shares
Less any Proceeds per Shares APF Estimated Value per Average
Distributions of $10,000 Offered to Shares Estimated of APF Shares $10,000 Original
Net Sales Original Income Payable to Acquisition after Acquisition Limited Partner
Proceeds(1) Investment(1) Fund Income Fund Expenses Expenses Investment
- ---------------- ---------------- ---------- ----------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$35,000,000 $10,000 1,850,049 $37,000,980 $437,000 $36,563,980 $10,351
</TABLE>
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(1) Income Fund has had no distributions of net sales proceeds.
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If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2004. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2004. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest. For more detailed information, see "The Acquisition" and
"Description of the Notes" in the consent solicitation.
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1).................................................... $ 21,011
Appraisals and Valuation(2)...................................... 6,765
Fairness Opinions(3)............................................. 30,000
Solicitation Fees(4)............................................. 18,561
Printing and Mailing Fees(5)..................................... 121,094
Accounting and Other Fees(6)..................................... 44,956
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Subtotal....................................................... 242,387
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(7)........................ 89,272
Legal Closing Fees(8)............................................ 44,095
Partnership Liquidation Costs(9)................................. 61,246
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Subtotal....................................................... 194,613
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Total............................................................ $437,000
========
</TABLE>
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(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $312,063. Your Income
Fund's pro-rata portion of these fees was determined based on the
percentage of the value of the APF Share consideration payable to your
Income Fund, based on the exchange value, to the total value of the APF
Share consideration payable to all of the Income Funds, based on the
exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the Income
Funds in connection with the Acquisition were $105,420. Your Income Fund's
pro-rata portion of these fees was determined based on number of restaurant
properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and incurred a
fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $249,626. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $1,610,399. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
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(6) Aggregate accounting and other fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $683,904. Your Income
Fund's pro-rata portion of these fees was determined based on the
percentage of your Income Fund's total assets as of March 31, 1999 to the
total assets of all of the Income Funds as of March 31, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by all of
the Income Funds in connection with the Acquisition is estimated to be
$1,312,808. Your Income Fund's pro-rata portion of these fees was
determined based on the percentage of the value of the APF Share
consideration payable to your Income Fund, based on the exchange value, to
the total value of the APF Share consideration payable to all of the Income
Funds, based on the exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,454. Your Income
Fund's pro-rata portion of these fees was determined based on the
percentage of your Income Fund's total assets as of March 31, 1999 to the
total assets of all of the Income Funds as of March 31, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of the Income
Funds in connection with the Acquisition is estimated to be $895,326. Your
Income Fund's pro-rata portion of these costs was determined based on the
percentage of the value of the APF Share consideration payable to your
Income Fund, based on the exchange value, to the total value of the APF
Share consideration payable to all of the Income Funds, based on the
exchange value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer fact sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the Prospectus/Consent Solicitation
Statement to you and the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 80% or more in value of your Income Fund's
restaurant properties acquired within two years of the initial date of the
prospectus (March 20, 1991). Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding units.
Consequence of Failure to Approve the Acquisition
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition, the Acquisition may
not be consummated under the terms of the partnership agreement. In such event,
we plan to continue to operate your Income Fund as a going concern and to
eventually dispose of your Income Fund's restaurant properties approximately 7
to 12 years after they were acquired or as soon thereafter if, in our opinion,
market conditions permit, as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the
solicitation, materials, which include the consent solicitation this supplement
and the other materials distributed to you, and the terms of APF's Acquisition
of your Income Fund, prior to voting on the Acquisition. The special meeting
will be held at 10:00 a.m., Eastern time, on , 1999, at . We and
members of APF's management intend to solicit actively your support for the
Acquisition and would like to use the special meeting to answer questions about
the Acquisition and the solicitation materials and to explain in person our
reasons for recommending that you vote "For" the Acquisition.
S-9
<PAGE>
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain their votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning on attending the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about ,
1999 and will continue until the later of (a) , 1999 a date not less than
60 calendar days from the initial delivery of the solicitation materials, or
(b) such later date as we may select and as to which we give you notice. At our
discretion, we may elect to extend the solicitation period. Under no
circumstances will the solicitation period be extended beyond March 31, 2000.
Any consent form received by Corporate Election Services prior to 5:00 p.m.,
Eastern time, on the last day of the solicitation period will be effective
provided that such consent form has been properly completed and signed. If you
fail to return a signed consent form by the end of the solicitation period,
your units will be counted as voting "Against" the Acquisition of your Income
Fund and you will receive APF Shares if your Income Fund is acquired. If you
prefer, you may instead vote by telephone according to the instructions on your
consent form.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
S-10
<PAGE>
During the years ended December 31, 1996, 1997 and 1998 and the quarter
ended March 31, 1999, the aggregate amounts accrued or paid by your Income Fund
to us are shown below under "Historical Distributions Paid to the General
Partners and Affiliates" and the estimated amounts of compensation that would
have been paid had the Acquisition been in effect for the periods presented,
are shown below under "Pro Forma Distributions to Be Paid to the General
Partners Following the Acquisition":
<TABLE>
<CAPTION>
Year Ended December 31, Quarter Ended
----------------------- March 31,
1996 1997 1998 1999
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the
General Partners and Affiliates:
General Partner Distributions......... -- -- -- --
Accounting and Administrative
Services............................. $82,847 $79,234 $94,808 $25,330
Broker/Dealer Commissions............. -- -- -- --
Due Diligence and Marketing Support
Fees................................. -- -- -- --
Acquisition Fees...................... -- -- -- --
Asset Management Fees................. -- -- -- --
Real Estate Disposition Fees(1)....... -- -- -- --
------- ------- ------- -------
Total historical.................... $82,847 $79,234 $94,808 $25,330
Pro Forma Distributions to Be Paid to
the General Partners Following the
Acquisition:
Cash Distributions on APF Shares...... $19,260 $26,144 $32,490 $ 7,301
Salary Compensation................... -- -- -- --
------- ------- ------- -------
Total pro forma..................... $19,260 $26,144 $32,490 $ 7,301
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to certain minimum
returns to the Limited Partners. To date, no such fees have been paid
since the required minimum returns have not been made to the Limited
Partners.
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
contained herein under the caption "Financial Statements" and in the consent
solicitation under the caption "Summary--Our Reasons for Supporting the
Acquisition--Prices for Income Fund Units."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31, 1999
------------------------ --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income....... $850 $845 $837 $831 $646 $179 $132
Distributions from Return of
Capital(1)..................... 50 65 73 89 254 46 93
---- ---- ---- ---- ---- ---- ----
Total......................... $900 $910 $910 $920 $900 $225 $225
==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from certain non-cash
items. This amount is not required to be presented as a return of capital
except for purposes of this table, and the Income Fund has not treated this
amount as a return of capital for any other purpose.
Cash distributions for the year ended December 31, 1997, include $70,000 of
amounts earned in 1997, but declared payable in the first quarter of 1998.
S-11
<PAGE>
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses during 1999. Thus, the pro forma information regarding
the distributions to APF stockholders for the quarter ended March 31, 1999 is
not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of
your Income Fund. After careful evaluation, we have concluded that the
Acquisition is the best way to maximize the value of your investment. We
recommend that you and the other Limited Partners approve the Acquisition and
receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the Acquisition
with those of several alternatives, the Acquisition is more economically
attractive to you and the other Limited Partners than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to certain closing conditions. Second, if your Income Fund is acquired
all Limited Partners of your Income Fund who vote against the Acquisition will
be given the option of receiving APF Shares or the notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others, that we will be relieved
from certain ongoing liabilities with respect to your Income Fund if it is
acquired by APF. For a further discussion of the conflicts of interest and
potential benefits of the Acquisition to us, see "Conflicts of Interest" below.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount
S-12
<PAGE>
of consideration offered to us and the Limited Partners, including dissenting
Limited Partners who select the notes, constitute fair value. We compared the
values of the consideration which would have been received by you and the other
Limited Partners in alternative transactions and concluded that the Acquisition
is fair based on such comparison. In addition, we believe the Acquisition is
the best way to maximize the return on your investment because of your ability
to participate in the potential appreciation of APF Shares. Since the
investment in your Income Fund is an investment in a static portfolio due to
the restrictions contained in your Income Fund's partnership agreement and
limited capital resources, your investments have less of an opportunity to
appreciate. Because APF is a growth-oriented operating company, you will have
the opportunity, as an APF stockholder, to participate in APF's future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinions of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinions of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., an affiliate of CNL Group, Inc., and (3) Valuation
Associates has previously performed valuation appraisals for APF. See "Reports,
Opinions and Appraisals" in the consent solicitation.
On rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to, any other
aspect of the Acquisition, including:
. the value of fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition
or the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts of allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Legg Mason's opinion also does not compare the relative merits of the
Acquisition with those of any other transaction or business strategy which were
or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares will exceed the going concern value and
liquidation value of your Income Fund.
S-13
<PAGE>
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Net Book Value of the Income Fund. We calculated the book value of your
Income Fund under generally accepted accounting principles, or GAAP, as of
March 31, 1999 per average $10,000 original investment. Since the calculation
of the book value was done on a GAAP basis, it is primarily based on historical
cost and, therefore, it is not indicative of the true fair market value of your
Income Fund. This figure was compared to three other figures
1 the value of the Income Fund if it commenced an orderly liquidation of
its investment portfolio on December 31, 1998,
2 the value of the Income Fund if it continued to operate in accordance
with its existing partnership agreement and business plans, and
3 the estimated value of the APF Shares, based on the exchange value, paid
to each Income Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated Value
of APF Shares
Original per Average
Limited Partner $10,000
Investments Less Original
any Distributions GAAP Book Liquidation Going Concern Limited Partner
of Sales Proceeds(1) Value Value(2) Value(2) Investment
-------------------- --------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
CNL Income Fund IX,
Ltd.................... $10,000 $8,303 $9,650 $10,310 $10,351
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
(2) Liquidation and going concern values were based on appraisals prepared by
Valuation Associates. For a complete description of the methodologies
employed by Valuation Associates, see "Reports, Opinions and Appraisals"
in the consent solicitation.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have contractual
obligations pursuant to your Income Fund's partnership agreement as well as
state law to assess whether the terms of the Acquisition are fair and equitable
to the Limited Partners of your Income Fund without regard to whether the
Acquisition is fair and equitable to any of the other participants, including
the Limited Partners in other Income Funds. James M. Seneff, Jr. and Robert A.
Bourne act as the individual general partners of all of the Income Funds and
also as members of the Board of Directors of APF. While Messrs. Seneff and
Bourne have sought faithfully to discharge their obligations to your Income
Fund, there is an inherent conflict of interest in serving, directly or
indirectly, in a similar capacity with respect to your Income Fund and also on
APF's Board of Directors.
S-14
<PAGE>
Lack of Independent Representation
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received. If an independent representative
had been retained for the Income Funds, either collectively or on an individual
basis, the fees and expenses of the Acquisition would have been higher. No
group of Limited Partners was empowered to negotiate the terms and conditions
of the Acquisition or to determine what procedures should be used to protect
the rights and interests of the Limited Partners. In addition, no investment
banker, attorney, financial consultant or expert was engaged to represent the
interests of the Limited Partners. We have been the parties responsible for
structuring all the terms and conditions of the Acquisition. Legal counsel
engaged to assist with the preparation of the documentation for the
Acquisition, including this consent solicitation, was engaged by us and did not
serve, or purport to serve, as legal counsel for the Income Funds or Limited
Partners. If an independent representative had been retained for the Income
Funds, the terms of the Acquisition may have been different and possibly more
favorable to the Limited Partners. In particular, had separate representation
for each of the Income Funds been arranged by us, issues unique to the value of
each of the specific Income Funds might have been highlighted or received
greater attention, resulting in adjustments to the value assigned to the assets
of such Income Funds and increasing the number of APF Shares or notes that
would be allocable to such Income Fund if acquired in the Acquisition.
Substantial Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive three material benefits. These benefits include:
. With respect to our ownership in your Income Fund, we may be issued up
to 16,817 APF Shares in the aggregate in accordance with the terms of
your Income Fund's partnership agreement. The 16,817 APF Shares issued
to us will have an estimated value, based on the exchange value, of
approximately $336,340.
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr.
Seneff serving as Chairman of APF and Mr. Bourne serving as Vice
Chairman. Furthermore, they will be entitled to receive performance-
based incentives, including stock options under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of the Income Funds, we are legally liable for all of
Income Funds liabilities to the extent that the Income Funds are unable
to satisfy such liabilities. Because the partnership agreement for each
Income Fund prohibits the Income Funds from incurring indebtedness, the
only liabilities the Income Funds' have are liabilities with respect to
their ongoing business operations. In the event that one or more Income
Funds are acquired by APF, we would be relieved of our legal obligation
to satisfy the liabilities of the acquired Income Fund or Income Funds.
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Certain Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund. If
your Income Fund is acquired by APF, and you have voted "For" the Acquisition,
you will receive APF Shares. If you have voted "Against" the Acquisition but
your Income Fund is acquired by APF, you may elect to receive notes.
S-15
<PAGE>
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of Units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under certain circumstances, even
if APF were to make the same level of distributions as your Income Fund, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you. For certain other differences attributable to APF's status as a REIT,
see "--Taxation of APF" and "--Taxation of Stockholders--Taxable Domestic
Stockholders" in the consent solicitation.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF, the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain and loss based on the
exchange value, for an average $10,000 original Limited Partner investment in
your Income Fund, is set forth in the table below for those Limited Partners
subject to federal income taxation.
<TABLE>
<CAPTION>
Estimated
Gain/(Loss) per
Average $10,000
Original Limited
Partner
Investment(1)
----------------
<S> <C>
CNL Income Fund IX, Ltd........................................ $1,786
</TABLE>
- --------
(1) Values are based on the exchange value established by APF. Upon listing
the APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be significantly below the exchange value.
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one more individuals or entities in exchange for the stock of that corporation,
and (2) immediately after the exchange, such individuals or entities are in
control of the corporation. For purposes of section 351(a), control is defined
as the ownership of stock possessing at least 80 percent of the total combined
voting power of all classes of stock entitled to vote and at least 80 percent
of the total number of shares of all other classes of stock of the corporation.
APF has represented to Shaw Pittman,
S-16
<PAGE>
APF's tax counsel, that, following the Acquisition, the Limited Partners of
the Income Funds will not own stock possessing at least 80 percent of the
total combined voting power of all classes of APF stock entitled to vote and
at least 80 percent of the total number of shares of all other classes of APF
stock. Based upon this representation, Shaw Pittman has opined that the
Acquisition will not result in the acquisition of control of APF by the
Limited Partners for purposes of section 351(a). Accordingly, the transfer of
assets will result in recognition of gain or loss by each Fund that is
acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by
your Income Fund and (b) the amount of your Income Fund's liabilities, if
any, assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund
to the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner
in your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until --------, 2004, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by
your Income Fund in the year of the Acquisition will be equal to the value of
the APF Shares and cash received by your Income Fund multiplied by the ratio
that the gross profit realized by your Income Fund in the Acquisition bears to
the total contract price for your Income Fund's assets. To the extent your
Income Fund realizes depreciation recapture income under section 1245 or
section 1250 of the Code, the recapture income will also be recognized by your
Income Fund in the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income
Fund's assets over the adjusted tax basis of those assets. The contract price
will equal the selling price reduced by certain qualified indebtedness
encumbering your Income Fund's assets, if any, that is assumed or taken
subject to by the Operating Partnership. The exact amount of the gain to be
recognized by your Income Fund in the year of the Acquisition will also vary
depending upon the decisions of the Limited Partners to receive APF Shares or
notes.
In general, gains or losses realized with respect to transfers of non-
dealer real estate and equipment in the Acquisition are likely to be treated
as realized from the sale of a "section 1231 asset," which is, real property
or a depreciable asset used in a trade or business and held for more than one
year. Your share of gains or losses from the sale of section 1231 assets of
your Income Fund would be combined with any other section 1231 gains and
losses that you recognize in that year. If the result is a net loss, such loss
is characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is
carried forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain
or loss that your Income Fund recognizes will be allocated to you and the
other Limited Partners in accordance with the terms of your Income Fund's
partnership agreement. Each Limited Partner will be allocated and must report
his, her or its allocable share of such gain, if any, pursuant to these terms,
regardless of the Limited Partner's decision to receive notes rather than APF
Shares. Even though a Limited Partner's election of the notes may decrease the
S-17
<PAGE>
amount of gain your Income Fund recognizes, the electing Limited Partner still
will be required to take into account his, her or its share of your Income
Fund's gain as determined under the partnership agreement of your Income Fund.
Therefore, Limited Partners who elect the notes may recognize gain in the year
of the Acquisition despite the fact that they will not receive cash with which
to pay the tax on the gain. Such Limited Partners will adjust the basis of the
notes as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes. See "--Tax Consequences of Liquidation and
Termination of Your Income Fund" below.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition, including gain or loss resulting from the Acquisition. If
your taxable year is not the calendar year, you could be required to recognize
as income in a single taxable year your share of your Income Fund's income
attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units, and your holding period
for the notes for purposes of determining capital gain or loss from the
disposition of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17) or
(20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
For a discussion of the taxation of APF, see "Federal Income Tax
Considerations--Taxation of APF" in the consent solicitation.
S-18
<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 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 2,307,364 1,391,466 8,137 (2,450,663)(b),(c)
Interest and
Other Income..... 2,214,763 0 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 0 1,095,269 2,563,714 1,323,577 64,186 (377,734)(e)
Management and
Advisory Fees.... 697,364 0 697,364 0 0 611,196 (1,308,560)(f)
Fees to Related
Parties.......... 0 0 0 23,326 292,575 0 (292,786)(g)
Interest
Expense.......... 0 0 0 50,730 0 4,769,268 0
State Taxes...... 235,208 0 235,208 0 0 0 0
Depreciation--
Other............ 0 0 0 39,581 26,238 0 0
Depreciation--
Property......... 1,548,813 349,465(a) 1,898,278 0 0 0 0
Amortization..... 7,368 0 7,368 0 0 0 536,625 (h)
Transaction
Costs............ 125,926 0 125,926 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
Total Expenses.. 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650 (1,442,455)
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) $ (946,140)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 0 17,271 0 0 0 0
Gain on Sale of
Properties....... 0 0 0 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 (215,797) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
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) (946,140)
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) $(1,194,819)
=========== ========== =========== ========== ========== ========== ===========
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund IX, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $14,523,161 $ 591,983 $ 22,938 (j) $15,138,082
Fees............. 1,256,304 0 ( 15,218)(k) 1,241,086
Interest and
Other Income..... 7,687,325 23,251 0 7,710,576
------------ ---------- ------------------ ------------
Total Revenue... $23,466,790 $615,234 $ 7,720 $24,089,744
Expenses:
General and
Administrative... 4,669,012 58,727 ( 24,080)(l),(m) 4,703,659
Management and
Advisory Fees.... 0 0 0 (n) 0
Fees to Related
Parties.......... 23,115 0 0 23,115
Interest
Expense.......... 4,819,998 0 0 4,819,998
State Taxes...... 235,208 24,759 7,546 (o) 267,513
Depreciation--
Other............ 65,819 0 0 65,819
Depreciation--
Property......... 1,898,278 75,535 37,630 (p) 2,011,443
Amortization..... 543,993 375 0 544,368
Transaction
Costs............ 125,926 35,275 0 161,201
------------ ---------- ------------------ ------------
Total Expenses.. 12,381,349 194,671 21,096 12,597,116
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties, and
Provision for
Losses on
Properties....... $11,085,441 $ 420,563 $ (13,376) $11,492,628
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 135,902 (20,417)(q) 132,756
Gain on Sale of
Properties....... 0 75,997 0 75,997
Provision For
Loss on
Properties....... (215,797) 0 0 (215,797)
------------ ---------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 10,886,915 632,462 (33,793) 11,485,584
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ---------- ------------------ ------------
Net
Earnings(Losses).. $10,886,915 $ 632,462 $ (33,793) $11,485,584
============ ========== ================== ============
</TABLE>
S-19
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
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
============ =========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 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
============ =========== ============ ========== ========== ============ ===========
Weighted average
units
outstanding
during period... n/a n/a n/a n/a n/a n/a n/a
============ =========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,401 n/a 37,347,401 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 n/a 37,348,464 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... 14,237,405 n/a n/a n/a n/a n/a n/a
Cash
distributions
declared per
$10,000
Investment...... 191 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 $ -- $ -- $ -- $ 0
Mortgages/notes
receivable...... $ 41,269,740 0 $ 41,269,740 $ -- $ -- $247,896,287 $ 0
Receivables,
net............. $ 548,862 0 $ 548,862 $7,141,967 $5,457,493 $ 1,969,339 (148,629)(w)
Investment
in/due from
joint ventures.. $ 1,083,564 0 $ 1,083,564 $ -- $ -- $ -- 0
Total assets.... $708,694,145 $33,656,518(u) $742,350,663 $8,223,820 $6,308,406 $264,700,433 $31,760,599 (v1),(w)
Total
liabilities/
minority
interest........ $ 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 $32,180,969 (v1),(x)
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund IX, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- ------------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 542 $ 40 n/a 582
============== =========== ==================== ==================
Earnings per
share/unit...... $ n/a $ 0.18 $ n/a $ 0.25
============== =========== ==================== ==================
Book value per
share/unit...... $ n/a $ 8.30 $ n/a $ 16.39
============== =========== ==================== ==================
Dividends per
share/unit...... $ n/a $ 0.23 $ n/a $ n/a
============== =========== ==================== ==================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 3.26x
============== =========== ==================== ==================
Weighted average
units
outstanding
during period... n/a 3,500,000 n/a n/a
============== =========== ==================== ==================
Weighted average
shares
outstanding
during period... 43,497,401 n/a 1,828,199 45,325,600 (r)
============== =========== ==================== ==================
Shares
outstanding..... 43,498,464 n/a 1,828,199 45,326,663
============== =========== ==================== ==================
Cash
distributions
declared:....... n/a 787,501 n/a $ 19,676,534 (s)
==================
Cash
distributions
declared per
$10,000
Investment...... n/a 225 n/a $ 217 (t)
==================
Balance sheet
data:
Real estate
assets, net..... $ 647,547,023 $20,299,981 $10,179,910 (v2) $ 678,026,914
Mortgages/notes
receivable...... $ 289,166,027 $ -- $ 0 $ 289,166,027
Receivables,
net............. $ 14,969,032 $ 61,678 $ (8,412)(y) $ 15,022,298
Investment
in/due from
joint ventures.. $ 1,083,564 $ 6,421,708 $ 1,434,178 (v2) $ 8,939,450
Total assets.... $1,053,343,921 $30,024,255 $ 7,496,680 (v2),(y) $1,090,864,856
Total
liabilities/
minority
interest........ 346,929,801 $ 965,376 $ (8,412)(y) $ 347,886,765
Total equity.... $ 706,414,120 $29,058,879 $ 7,505,092 (v2) $ 742,978,091
</TABLE>
S-20
<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
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<CAPTION>
<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)
============
(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).
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:
<CAPTION>
<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>
(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)
<TABLE>
<S> <C>
Amortization of goodwill $536,625
</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 $22,938 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the Income Fund as if the leases had been
acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<CAPTION>
<S> <C>
Management fees $ 0
Reimbursement of administrative costs (15,218)
--------
$(15,218)
========
</TABLE>
S-21
<PAGE>
(l) Represents the elimination of $15,218 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $8,862 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports
for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income Fund
to the Advisor.
(o) Represents additional state income taxes of $7,546 resulting from
assuming that acquisitions of properties that had been operational when
APF acquired them from January 1, 1999 through May 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 Fund 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 $37,630 as a result
of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated using
the straight-line method over the remaining useful lives of the
properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $20,417
as a result of adjusting the historical basis of the real estate owned
by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings owned indirectly by the
Income Fund is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(r) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 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 Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Income Fund Total
----------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Shares Offered 3,800,000 2,350,000 1,828,198.55 7,978,198.55
Exchange Value $20 $20 $20 $20
----------- ----------- ------------ ------------
Share Consideration $76,000,000 $47,000,000 $ 36,563,971 $159,563,971
Cash Consideration -- -- 437,000 437,000
APF Transaction Costs 5,083,894 3,143,987 2,475,119 10,703,000
----------- ----------- ------------ ------------
Total Purchase Price $81,083,894 $50,143,987 $ 39,476,090 $170,703,971
=========== =========== ============ ============
Allocation of Purchase
Price:
Net Assets --
Historical $ 7,141,252 $10,006,878 $ 29,058,879 $ 46,207,009
Purchase Price
Adjustments:
Land and buildings on
operating leases 8,110,527 8,110,527
Net investment in
direct financing
leases 2,069,383 2,069,383
Investment in joint
ventures 1,434,178 1,434,178
Accrued rental income (1,163,425) (1,163,425)
Intangibles and other
assets (2,792,876) (33,452) (2,826,328)
Goodwill* 42,929,985 -- 42,929,983
Excess purchase price 73,942,642 -- -- 73,942,642
----------- ----------- ------------ ------------
Total Allocation $81,083,894 $50,143,987 $ 39,476,090 $170,703,971
=========== =========== ============ ============
</TABLE>
- --------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
S-22
<PAGE>
The APF Transaction costs of $10,703,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess purchase
price paid for the Advisor to a related party of $73,942,642 was expensed at
March 31, 1999 because the Advisor has not been deemed to qualify as a
"business" for purposes of applying APB Opinion No. 16, "Business
Combinations". Goodwill of 42,929,985 relating to the acquisition of the CNL
Financial Services Group is being amortized over 20 years. APF did not acquire
any intangibles as part of any of the acquisitions. The entries were as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC)--Class A 8,600
Common Stock (CFA, CFS, CFC)--Class B 4,825
APIC (CFA, CFS, CFC) 13,857,645
Retained Earnings 3,277,060
Accumulated distributions in excess of earnings 73,942,642
Goodwill for CFC (Intangibles and other assets) 42,929,985
CFC/CFS Org Costs/Other Assets 2,792,876
Cash to pay APF transaction costs 8,227,881
APF Common Stock 61,500
APF APIC 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital 29,058,879
Land and buildings on operating leases 8,110,527
Net investment in direct financing leases 2,069,383
Investment in joint ventures 1,434,178
Accrued rental income 1,163,425
Intangibles and other assets 33,452
Cash to pay APF Transaction costs 2,475,119
Cash consideration to Income Funds 437,000
APF Common Stock 18,282
APF APIC 36,545,689
(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 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.
(y) Represents the elimination by the Income Fund of $8,412 in related
party payables recorded as receivables by the Advisor.
S-23
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND IX, LTD.
The following table sets forth certain financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
IX, Ltd." in this Supplement.
<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>
Revenues (1)............ $ 751,136 $ 826,323 $ 3,100,685 $ 3,230,343 $ 3,404,066 $ 3,428,147 $ 3,362,394
Net income (2).......... 632,462 709,219 2,286,698 2,937,632 2,960,299 2,987,971 3,003,583
Cash distributions
declared (3)........... 787,501 857,501 3,220,004 3,150,004 3,185,004 3,185,004 3,150,002
Net income per Unit..... 0.18 0.20 0.65 0.83 0.84 0.85 0.85
Cash distributions
declared per
Unit (3)............... 0.23 0.25 0.92 0.90 0.91 0.91 0.90
GAAP book value per
Unit................... 8.30 8.57 8.35 8.61 8.67 8.74 8.79
Weighted average number
of Limited Partner
Units outstanding...... 3,500,000 3,500,000 3,500,000 3,500,000 3,500,000 3,500,000 3,500,000
<CAPTION>
March 31, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $30,024,255 $30,986,810 $30,099,078 $31,096,421 $31,343,847 $31,517,255 $31,735,391
Total partners'
capital................ 29,058,879 29,998,942 29,213,918 30,147,224 30,359,596 30,584,301 30,781,334
</TABLE>
- --------
(1) Revenues include equity in earnings of joint ventures and adjustments to
accrued rental income as a result of a tenant filing for bankruptcy.
(2) Net income for the year ended December 31, 1998 includes $314,775 from
provision for loss on land and building and impairment in carrying value of
net investment in direct financing lease. Net income for the quarter ended
March 31, 1999 and for the year ended December 31, 1997, includes $75,997
$199,643, respectively, from a gain on sale of land, buildings and net
investment in direct financing lease.
(3) Distributions for the quarter ended March 31, 1998 and the year ended
December 31, 1998, included a special distribution to the Limited Partners
of $70,000 and distributions for the years ended December 31, 1996 and
1995, each includes a special distribution to the Limited Partners of
$35,000, which represented cumulative excess operating reserves.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND IX, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on April
16, 1990, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurants, as well as land
upon which restaurants were to be constructed, which are leased primarily to
operators of selected national and regional fast-food and family-style
restaurant chains. The leases are generally triple-net leases, with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of 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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<PAGE>
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
S-26
<PAGE>
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
S-27
<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.
S-29
<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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<PAGE>
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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<PAGE>
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.
S-32
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998...... F-1
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998.................................................................... F-2
Condensed Statements of Partner's Capital for the Quarter Ended March 31,
1999 and for the Year Ended December 31, 1998........................... F-3
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998................................................................ F-4
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998........................................................... F-5
Report of Independent Accountants........................................ F-7
Balance Sheets as of December 31, 1998 and 1997.......................... F-8
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-9
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-10
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-12
Unaudited Pro Forma Financial Information................................ F-21
Unaudited Pro Forma Balance Sheet as of March 31, 1998................... F-22
Unaudited Pro Forma Statement of Earnings for the Quarter Ended March 31,
1999.................................................................... F-24
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998.................................................................... F-26
Unaudited Pro Forma Statement of Cash Flows for the Quarter Ended March
31, 1999................................................................ F-28
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................ F-30
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements.............................................................. F-32
</TABLE>
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
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-1
<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-2
<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-3
<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-4
<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-5
<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. 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-6
<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-7
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
building.............................................. $15,066,178 $14,163,111
Net investment in direct financing leases, less
allowance for impairment in carrying value............ 5,905,995 7,482,757
Investment in joint ventures........................... 6,473,381 6,619,364
Cash and cash equivalents.............................. 1,287,379 1,250,388
Receivables, less allowance for doubtful accounts of
$206,052 and $108,316................................. 93,569 96,134
Prepaid expenses....................................... 3,185 3,924
Lease costs, less accumulated amortization of $1,577
and $77............................................... 13,423 14,923
Accrued rental income.................................. 1,255,968 1,465,820
----------- -----------
$30,099,078 $31,096,421
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 1,103 $ 4,490
Accrued and escrowed real estate taxes payable......... 9,022 45,591
Distributions payable.................................. 787,501 787,501
Due to related parties................................. 24,187 4,619
Rents paid in advance and deposits..................... 63,347 106,996
----------- -----------
Total liabilities.................................... 885,160 949,197
Partners' capital...................................... 29,213,918 30,147,224
----------- -----------
$30,099,078 $31,096,421
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $1,804,248 $1,742,351 $1,854,245
Adjustments to accrued rental income....... (267,600) -- --
Earned income from direct financing
leases.................................... 826,962 830,603 917,074
Contingent rental income................... 79,780 74,867 120,999
Interest and other income.................. 61,129 44,669 51,348
---------- ---------- ----------
2,504,519 2,692,490 2,943,666
---------- ---------- ----------
Expenses:
General operating and administrative....... 142,996 153,175 152,437
Professional services...................... 43,685 24,658 26,610
Bad debt expense........................... 5,133 21,000 --
Real estate taxes.......................... 6,247 30,835 9,906
State and other taxes...................... 14,337 11,126 2,775
Depreciation and amortization.............. 267,773 251,560 252,039
Transaction costs.......................... 19,041 -- --
---------- ---------- ----------
499,212 492,354 443,767
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Gain on Sale of Land and Building,
and Provision for Loss on Building and
Impairment in Carrying Value of Net
Investment in Direct Financing Lease........ 2,005,307 2,200,136 2,499,899
Equity in Earnings of Joint Ventures......... 596,166 537,853 460,400
Gain on Sale of Land and Building............ -- 199,643 --
Provision for Loss on Building and Carrying
Value of Net Investment in Direct Financing
Lease....................................... (314,775) -- --
---------- ---------- ----------
Net Income................................... $2,286,698 $2,937,632 $2,960,299
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 23,991 $ 27,380 $ 29,603
Limited partners........................... 2,262,707 2,910,252 2,930,696
---------- ---------- ----------
$2,286,698 $2,937,632 $2,960,299
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 0.65 $ 0.83 $ 0.84
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................... 3,500,000 3,500,000 3,500,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $132,789 $35,000,000 $(13,505,579) $13,146,091 $(4,190,000) $30,584,301
Distributions to
limited partners
($0.91 per limited
partner unit)......... -- -- -- (3,185,004) -- -- (3,185,004)
Net income............. -- 29,603 -- -- 2,930,696 -- 2,960,299
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 162,392 35,000,000 (16,690,583) 16,076,787 (4,190,000) 30,359,596
Distributions to
limited partners
($0.90 per limited
partner unit)......... -- -- -- (3,150,004) -- -- (3,150,004)
Net income............. -- 27,380 -- -- 2,910,252 -- 2,937,632
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 189,772 35,000,000 (19,840,587) 18,987,039 (4,190,000) 30,147,224
Distributions to
limited partners
($0.92 per limited
partner unit)......... -- -- -- (3,220,004) -- -- (3,220,004)
Net income............. -- 23,991 -- -- 2,262,707 -- 2,286,698
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $213,763 $35,000,000 $(23,060,591) $21,249,746 $(4,190,000) $29,213,918
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............ $ 2,695,934 $ 2,666,373 $ 2,900,048
Distributions from joint ventures..... 738,544 676,806 603,833
Cash paid for expenses................ (223,753) (229,884) (186,126)
Interest received..................... 42,665 44,669 38,485
----------- ----------- -----------
Net cash provided by operating
activities.......................... 3,253,390 3,157,964 3,356,240
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
building............................. -- 1,053,571 --
Investment in joint venture........... 3,605 (1,049,762) --
Payment of lease costs................ -- (15,000) --
----------- ----------- -----------
Net cash provided by (used in)
operating activities................ 3,605 (11,191) --
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners..... (3,220,004) (3,185,003) (3,185,004)
----------- ----------- -----------
Net cash used in financing
activities.......................... (3,220,004) (3,185,003) (3,185,004)
----------- ----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents...................... 36,991 (38,230) 171,236
Cash and Cash Equivalents at Beginning
of Year............................... 1,250,388 1,288,618 1,117,382
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year.................................. $ 1,287,379 $ 1,250,388 $ 1,288,618
=========== =========== ===========
Reconciliation of Net Income to Net
Cash Provided by Operating Activities:
Net income............................ $ 2,286,698 $ 2,937,632 $ 2,960,299
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense...................... 5,133 21,000 --
Depreciation.......................... 266,273 251,483 251,483
Amortization.......................... 1,500 77 556
Equity in earnings of joint ventures,
net of distributions................. 142,378 138,953 143,433
Gain on sale of land and building..... -- (199,643) --
Provision for loss on building and
impairment in carrying value of net
investment in direct financing
lease................................ 314,775 -- --
Decrease (increase) in receivables.... (2,568) (41,878) 87,823
Decrease (increase) in prepaid
expenses............................. 739 (79) (2,913)
Decrease in net investment in direct
financing leases..................... 92,647 121,311 89,696
Decrease (increase) in accrued rental
income............................... 209,852 (70,837) (225,434)
Increase (decrease) in accounts
payable and accrued expenses......... (39,956) (16,524) 12,111
Increase (decrease) in due to related
parties.............................. 19,568 3,214 (4,639)
Increase (decrease) in rents paid in
advance and deposits................. (43,649) 13,255 43,825
----------- ----------- -----------
Total adjustments.................... 966,692 220,332 395,941
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................ $ 3,253,390 $ 3,157,964 $ 3,356,240
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Land and building under operating
lease exchanged for land and building
under operating lease................ $ -- $ -- $ 406,768
=========== =========== ===========
Distributions declared and unpaid at
December 31.......................... $ 787,501 $ 787,501 $ 822,500
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund IX, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
method. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (see
Note 4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, will be removed from the accounts and gains or
losses from sales will be reflected in income. The general partners of the
Partnership review the properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through operations. The general partners determine whether an
impairment in value has occurred by comparing the estimated future undiscounted
cash flows, including the residual value of the property, with the carrying
cost of the individual property. If an impairment is indicated, the assets are
adjusted to their fair value. Although the general partners have made their
best estimate of these factors based on current conditions, it is reasonably
possible that changes could occur in the near term which could adversely affect
the general partners' estimate of net cash flows expected to be generated from
its properties and the need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership
F-12
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
continued to pursue collection of such amounts. If amounts are subsequently
determined to be uncollectible, the corresponding receivable and allowance for
doubtful accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership's investments in three joint
ventures and a property in Englewood, Colorado, for which the property is held
as tenants-in-common with an affiliate, are accounted for using the equity
method since the Partnership shares control with affiliates which have the same
general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Lease costs--Lease costs associated with negotiating a new lease are
amortized over the term of the new lease using the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. The more significant areas requiring the use
of management estimates relate to the allowance for doubtful accounts and
future cash flows associated with long-lived assets. Actual results could
differ from those estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
F-13
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
2. Leases:
The Partnership leases its land and buildings to operators of national and
regional fast-food and family-style restaurants. The leases are accounted for
under the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." Some of the leases have been classified as operating
leases and some of the leases have been classified as direct financing leases.
For the leases classified as direct financing leases, the building portions of
the property leases are accounted for as direct financing leases while a
majority of the land portion of these leases are operating leases.
Substantially all leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant pays all property taxes and
assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew the
leases for two to five successive five-year periods subject to the same terms
and conditions as the initial lease. Most leases also allow the tenant to
purchase the property at fair market value after a specified portion of the
lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................... $ 8,207,939 $ 8,207,939
Buildings.......................................... 8,818,794 7,452,942
----------- -----------
17,026,733 15,660,881
Less accumulated depreciation...................... (1,711,187) (1,497,770)
----------- -----------
$15,315,546 $14,163,111
Less allowance for loss on building................ (249,368) --
----------- -----------
$15,066,178 $14,163,111
=========== ===========
</TABLE>
In June 1997, the Partnership sold its property in Alpharetta, Georgia, and
received net sales proceeds of $1,053,571, resulting in a gain of $199,643 for
financial reporting purposes. This property was originally acquired by the
Partnership in September 1991 and had a cost of approximately $711,200,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold the property for approximately $342,400 in excess of its
original purchase price.
During 1998, the Partnership recorded a provision for loss on building in
the amount of $249,368 for financial reporting purposes relating to the
property in Williamsville, New York. The tenant of this property filed for
bankruptcy during 1998, and rejected the lease. The allowance represents the
difference between the carrying value of the property at December 31, 1998 and
the current estimated net realizable value for this property.
Some leases provide for escalating guaranteed minimum rents throughout the
lease term. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the year ended December
31, 1998, the Partnership recognized a loss of $209,852 (net of $267,600 in
write-offs) and for the years ended December 31, 1997 and 1996, the Partnership
recognized income of $70,837, and $225,434, respectively, of such rental
income.
F-14
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,726,921
2000............................................................. 1,726,921
2001............................................................. 1,763,564
2002............................................................. 1,889,001
2003............................................................. 1,897,501
Thereafter....................................................... 9,771,187
-----------
$18,775,095
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Minimum lease payments receivable................. $11,521,454 $13,764,606
Estimated residual values......................... 2,091,629 2,495,379
Less unearned income.............................. (7,641,681) (8,777,228)
----------- -----------
5,971,402 7,482,757
Less allowance for impairment in carrying value... (65,407) --
----------- -----------
Net investment in direct financing leases......... $ 5,905,995 $ 7,482,757
=========== ===========
</TABLE>
In August 1998, four of the Partnership's leases were amended. As a result,
the Partnership reclassified the direct financing leases to operating leases.
In accordance with Statement of Financial Accounting Standards #13, "Accounting
for Leases," the Partnership recorded each of the reclassified leases at the
lower of original cost, present fair value, or present carrying amount. No loss
on termination of direct financing lease was recorded for financial reporting
purposes.
During 1998, the Partnership recorded a provision for loss on investment in
direct financing lease of $65,407 for financial reporting purposes relating to
the Property in Rochester, New York, due to the fact that the tenant filed for
bankruptcy during 1998. The allowance represents the difference between the
carrying value of the Property at December 31, 1998 and the current estimated
net realizable value for this Property.
F-15
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 832,979
2000............................................................. 832,979
2001............................................................. 844,812
2002............................................................. 890,607
2003............................................................. 890,607
Thereafter....................................................... 7,229,470
-----------
$11,521,454
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
5. Investment in Joint Ventures:
The Partnership has a 45.2%, a 50 percent and a 27.33% interest in the
profits and losses of CNL Restaurant Investments II, CNL Restaurant Investments
III and Ashland Joint Venture, respectively. The remaining interests in these
joint ventures are held by affiliates of the Partnership which have the same
general partners.
In July 1997, the Partnership used the net sales proceeds from the sale of
the property in Alpharetta, Georgia, to acquire a 67 percent interest in an
IHOP property located in Englewood, Colorado, as tenants-in-common with an
affiliate of the general partners. The Partnership accounts for its investment
in this property using the equity method since the Partnership shares control
with an affiliate, and amounts relating to its investment are included in
investment in joint ventures.
CNL Restaurant Investments II and CNL Restaurant Investments III each own
and lease six properties to an operator of national fast-food restaurants and
Ashland Joint Venture owns and leases one property to an operator of national
fast-food restaurants. The Partnership and an affiliate, as tenants in common
own and lease one property to an operator of a national family-style
restaurant. The following presents the joint ventures' combined, condensed
financial information at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $12,253,332 $12,582,754
Net investment in direct financing lease.......... 991,524 1,003,680
Cash.............................................. 1,196 15,124
Receivables....................................... 23,283 35,773
Prepaid expenses.................................. 24,790 23,544
Accrued rental income............................. 36,855 11,620
Liabilities....................................... 1,641 14,280
Partners' capital................................. 13,329,339 13,658,215
Revenues.......................................... 1,576,778 1,506,380
Net income........................................ 1,208,451 1,141,755
</TABLE>
The Partnership recognized income totalling $596,166, $537,853, and $460,400
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
F-16
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
6. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties, not in
liquidation of the Partnership, to the extent distributed, will be distributed
first to the limited partners in an amount sufficient to provide them with
their 10% Preferred Return, plus the return of their adjusted capital
contributions. The general partners will then receive, to the extent previously
subordinated and unpaid, a one percent interest in all prior distributions of
net cash flow and a return of their capital contributions. Any remaining sales
proceeds will be distributed 95 percent to the limited partners and five
percent to the general partners. Any gain from the sale of a property, not in
liquidation of the Partnership, is, in general, allocated in the same manner as
net sales proceeds are distributable. Any loss from the sale of a property is,
allocated first, on a pro rata basis, to partners with positive balances in
their capital accounts; and thereafter, 95 percent to the limited partners and
five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
declared distributions to the limited partners of $3,220,004, $3,150,004, and
$3,185,004, respectively. No distributions have been made to the general
partners to date.
F-17
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
7. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $2,286,698 $2,937,632 $2,960,299
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (97,473) (116,620) (123,734)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 92,647 121,311 89,696
Gain on sale of land and building for
financial reporting purposes in excess
of gain for tax reporting purposes..... -- (195,820) --
Equity in earnings of joint ventures for
tax reporting purposes in excess of
equity in earnings of joint ventures
for financial reporting purposes....... 8,256 36,745 37,469
Capitalization of transaction costs for
tax reporting purposes................. 19,041 -- --
Accrued rental income................... 209,852 (70,837) (225,434)
Rents paid in advance................... (44,149) 13,255 43,825
Allowance for loss on building and
investment in direct financing leases.. 314,775 -- --
Allowance for doubtful accounts......... 97,736 79,333 14,221
---------- ---------- ----------
Net income for federal income tax
purposes............................... $2,887,383 $2,804,999 $2,796,342
========== ========== ==========
</TABLE>
8. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors,
Inc. (hereinafter referred to as the "Affiliate") performed certain services
for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate an annual, noncumulative, subordinated management fee of
one percent of the sum of gross revenues from properties wholly owned by the
Partnership and the Partnership's allocable share of gross revenues from joint
ventures, but not in excess of competitive fees for comparable services. These
fees will be incurred and will be payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners have not received their 10% Preferred
Return in any particular year, no management fees will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1998, 1997, and 1996.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the
F-18
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
sale. However, if the net sales proceeds are reinvested in a replacement
property, no such real estate disposition fees will be incurred until such
replacement property is sold and the net sales proceeds are distributed. The
payment of the real estate disposition fee is subordinated to receipt by the
limited partners of their aggregate 10% Preferred Return, plus their adjusted
capital contributions. No deferred, subordinated real estate disposition fees
have been incurred since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $94,808, $79,234, and $82,487 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
The due to related parties at December 31, 1998 and 1997, totalled $24,187
and $4,619, respectively.
9. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from joint ventures), for each of the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Burger King Corporation and BK Acquisition,
Inc........................................... $647,953 $649,445 $623,949
TPI Restaurants, Inc........................... 557,000 556,700 565,351
Carrols Corporation............................ 388,121 440,057 442,286
Flagstar Enterprises, Inc...................... 367,211 436,312 460,762
Golden Corral Corporation...................... 360,555 337,337 N/A
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from joint ventures), for each of the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Burger King............................... $1,143,522 $1,249,715 $1,310,994
Shoney's.................................. 805,729 808,675 889,148
Hardees................................... 438,324 436,312 460,762
Golden Corral Family Steakhouse
Restaurants.............................. 360,555 337,337 N/A
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
F-19
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
10. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 3,700,097 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $36,414,830 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
11. Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 10 being adjusted to 1,850,049 shares valued at $20.00 per
APF share.
F-20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of the Advisor
and the CNL Restaurant Financial Services Group, and the acquisition of the
Income Fund (the acquisition of the Income Fund is referred to as the
"Acquisition"), and is based on estimates and assumptions set forth below in
the notes to such information which included pro forma adjustments. This
unaudited pro forma financial information has been prepared utilizing the
historical financial statements of APF, the historical combined financial
information of the Income Fund, the Advisor and CNL Restaurant Financial
Services Group (shown separately as CFS and CFC) and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, Income Fund, Advisor and CNL Restaurant Financial Services Group. The
pro forma balance sheet assumes that the Acquisition occurred on 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.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of March 31, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL
Historical Pro Forma Historical Financial
APF Adjustments Subtotal Advisor Services, Inc.
------------ ----------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating
leases (net
depreciation).......... 475,787,661 58,749,637 (A) 534,537,298 0 0
Net Investment in Direct
Financing
Leases................. 123,270,117 0 123,270,117 0 0
Mortgages and Notes
Receivable............. 41,269,740 0 41,269,740 0 0
Other Investments....... 16,199,792 0 16,199,792 0 0
Investment In Joint
Ventures............... 1,083,564 0 1,083,564 0 0
Cash and Cash
Equivalents............ 35,796,119 (25,093,119)(A) 10,703,000 591,712 552,415
Restricted
Cash/Certificates of
Deposit................ 2,007,278 0 2,007,278 0 0
Receivables (net
allowances)
/Due from Related
Party.................. 548,862 0 548,862 7,141,967 5,457,493
Accrued Rental Income... 5,007,334 0 5,007,334 0 0
Other Assets............ 7,723,678 0 7,723,678 490,141 298,498
Goodwill................ 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Assets........... $708,694,145 $33,656,518 $742,350,663 $8,223,820 $6,308,406
============ =========== ============ ========== ==========
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued
Liabilities............ $ 3,464,190 $ 0 $ 3,464,190 $ 576,531 $ 304,375
Accrued Construction
Costs
Payable................ 10,172,169 0 10,172,169 0 0
Distributions Payable... 0 0 0 119,808 0
Due to Related Parties.. 148,629 0 148,629 0 563,724
Income Tax Payable...... 0 0 0 0 0
Line of Credit/Notes
payable................ 34,150,000 33,656,518 (A) 67,806,518 386,229 0
Deferred Income......... 2,052,530 0 2,052,530 0 0
Rents Paid in Advance... 1,340,636 0 1,340,636 0 0
Minority Interest....... 280,970 0 280,970 0 0
Common Stock............ 373,483 0 373,483 0 0
Common Stock--Class A... 0 0 0 6,400 2,000
Common Stock--Class B... 0 0 0 3,600 724
Additional Paid-in-
capital................ 670,005,177 0 670,005,177 4,617,047 5,303,503
Accumulated
distributions in excess
of net earnings........ (13,293,639) 0 (13,293,639) 2,514,205 134,080
Partners Capital........ 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Liabilities and
Equity................ $708,694,145 $33,656,518 $742,350,663 $8,223,820 $6,308,406
============ =========== ============ ========== ==========
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of March 31, 1999
<TABLE>
<CAPTION>
Historical Historical
CNL Combining CNL Income
Financial Pro Forma Combined Fund IX, Pro Forma Adjusted
Corp. Adjustments APF Ltd. Adjustments Pro Forma
------------ ------------ -------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... 0 0 534,537,298 14,933,928 8,110,527 (B2) 557,581,753
Net Investment in Direct
Financing Leases....... 0 0 123,270,117 5,366,053 2,069,383 (B2) 130,705,553
Mortgages and Notes
Receivable............. 247,896,287 0 289,166,027 0 0 289,166,027
Other Investments....... 6,353,482 0 22,553,274 0 0 22,553,274
Investment In Joint
Ventures............... 0 0 1,083,564 6,421,708 1,434,178 (B2) 8,939,450
Cash and Cash
Equivalents............ 4,896,688 (8,227,881)(B1) 8,515,934 2,044,011 (2,475,119)(B2) 7,647,826
(437,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 853,243 0 2,860,521 0 0 2,860,521
Receivables (net
allowances)
/Due from Related
Party.................. 1,969,339 (148,629)(C) 14,969,032 61,678 (8,412)(E) 15,022,298
Accrued Rental Income... 0 0 5,007,334 1,163,425 (1,163,425)(B2) 5,007,334
Other Assets............ 2,731,394 (2,792,876)(B1) 8,450,835 33,452 (33,452)(B2) 8,450,835
Goodwill................ 0 42,929,985 (B1) 42,929,985 0 0 42,929,985
------------ ------------ -------------- ----------- ------------ --------------
Total Assets........... $264,700,433 $ 31,760,599 $1,053,343,921 $30,024,255 $ 7,496,680 $1,090,864,856
============ ============ ============== =========== ============ ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 1,613,959 $ 0 $ 5,959,055 $ 67,479 $ 0 $ 6,026,534
Accrued Construction
Costs Payable.......... 0 0 10,172,169 0 0 10,172,169
Distributions Payable... 0 0 119,808 787,501 0 907,309
Due to Related Parties.. 31,310,681 (148,629)(C) 31,874,405 8,412 (8,412)(E) 31,874,405
Income Tax Payable...... 271,741 (271,741)(D) 0 0 0 0
Line of Credit/Notes
payable................ 226,937,481 0 295,130,228 0 0 295,130,228
Deferred Income......... 0 0 2,052,530 0 0 2,052,530
Rents Paid in Advance... 0 0 1,340,636 101,984 0 1,442,620
Minority Interest....... 0 0 280,970 0 0 280,970
Common Stock............ 0 61,500 (B1) 434,983 0 18,282 (B2) 453,265
Common Stock--Class A... 200 (8,600)(B1) 0 0 0 0
Common Stock--Class B... 501 (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 3,937,095 122,938,500 (B1) 792,943,677 0 36,545,689 (B2) 829,489,366
(13,857,645)(B1)
Accumulated
distributions in excess
of net earnings........ 628,775 (3,277,060)(B1) (86,964,540) 0 0 (86,964,540)
(73,942,642)(B1)
271,741 (B1)
Partners Capital........ 0 0 0 29,058,879 (29,058,879)(B2) 0
------------ ------------ -------------- ----------- ------------ --------------
Total Liabilities and
Equity................ $264,700,433 $ 31,760,599 $1,053,343,921 $30,024,255 $ 7,496,680 $1,090,864,856
============ ============ ============== =========== ============ ==============
</TABLE>
F-23
<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
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $12,184,008 $2,339,153(a) $14,523,161 $ 0 $ 0 $ 0
Fees................... 0 0 0 2,307,364 1,391,466 8,137
Interest and Other
Income................ 2,214,763 0 2,214,763 47,213 129,362 5,233,919
----------- ---------- ----------- ---------- ---------- ----------
Total Revenue.......... $14,398,771 $2,339,153 $16,737,924 $2,354,577 $1,520,828 $5,242,056
Expenses:
General and
Administrative
Expenses.............. 1,095,269 0 1,095,269 2,563,714 1,323,577 64,186
Management and Advisory
Fees.................. 697,364 0 697,364 0 0 611,196
Fees Paid to Related
Parties............... 0 0 0 23,326 292,575 0
Interest Expense....... 0 0 0 50,730 0 4,769,268
State Taxes............ 235,208 0 235,208 0 0 0
Depreciation--Other.... 0 0 0 39,581 26,238 0
Depreciation--
Property.............. 1,548,813 349,465(a) 1,898,278 0 0 0
Amortization........... 7,368 0 7,368 0 0 0
Transaction Costs...... 125,926 0 125,926 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
Total Expenses......... 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, 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)
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 17,271 0 17,271 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Provision For Loss on
Properties............ (215,797) 0 (215,797) 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
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)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 127,496 48,017 73,166
----------- ---------- ----------- ---------- ---------- ----------
Net Earnings (Losses)... $10,490,297 $1,989,688 $12,479,985 $ (195,278) $ (73,545) $ (129,428)
=========== ========== =========== ========== ========== ==========
Earnings Per
Share/Unit............. $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ==========
Book Value Per
Share/Unit............. $ 17.59 $ 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
=========== ========== =========== ========== ========== ==========
Ratio of Earnings to
Fixed Charges.......... 50.03x n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========== ==========
Wtd. Avg. Units
Outstanding............ 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
=========== ========== =========== ========== ========== ==========
Shares Outstanding...... 37,348,464 n/a 37,348,464 n/a n/a n/a
=========== ========== =========== ========== ========== ==========
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 Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Combining Historical CNL
Pro Forma Combined Income Fund Pro Forma Adjusted
Adjustments APF IX, Ltd. Adjustments Pro Forma
----------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $14,523,161 $591,983 22,938 (j) $ 15,138,082
Fees................... (2,450,663)(b),(c) 1,256,304 0 (15,218)(k) 1,241,086
Interest and Other
Income................ 62,068 (d) 7,687,325 23,251 0 7,710,576
----------- ----------- -------- --------- ------------
Total Revenue.......... $(2,388,595) $23,466,790 $615,234 $ 77,20 $ 24,089,744
Expenses:
General and
Administrative
Expenses.............. (377,734)(e) 4,669,012 58,727 (24,080)(l),(m) 4,703,659
Management and Advisory
Fees.................. (1,308,560)(f) 0 0 0 (n) 0
Fees Paid to Related
Parties............... (292,786)(g) 23,115 0 0 23,115
Interest Expense....... 0 4,819,998 0 0 4,819,998
State Taxes............ 0 235,208 24,759 0 267,513
Depreciation--Other.... 0 65,819 0 7,546 (o) 65,819
Depreciation--
Property.............. 0 1,898,278 75,535 37,630 (p) 2,011,443
Amortization........... 536,625 (h) 543,993 375 0 544,368
Transaction Costs...... 0 125,926 35,275 0 161,201
----------- ----------- -------- --------- ------------
Total Expenses......... (1,442,455) 12,381,349 194,671 21,096 12,597,116
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties, and
Provision for Losses on
Properties............. $ (946,140) $11,085,441 $420,563 $ (13,376) $ 11,492,628
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 0 17,271 135,902 (20,417) (q) 132,756
Gain on Sale of
Properties............ 0 0 75,997 0 75,997
Provision For Loss on
Properties............ 0 (215,797) 0 0 (215,797)
----------- ----------- -------- --------- ------------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... (946,140) 10,886,915 632,462 (33,793) 11,485,584
Benefit/(Provision) for
Federal Income Taxes.. (248,679)(i) 0 0 0 0
----------- ----------- -------- --------- ------------
Net Earnings (Losses)... $(1,194,819) $10,886,915 $632,462 $ (33,793) $ 11,485,584
=========== =========== ======== ========= ============
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.18 $ n/a $ 0.25
=========== =========== ======== ========= ============
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.30 $ n/a 16.39
=========== =========== ======== ========= ============
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.23 $ n/a $ n/a
=========== =========== ======== ========= ============
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.26x
=========== =========== ======== ========= ============
Wtd. Avg. Units
Outstanding............ n/a n/a 3,500,00 n/a n/a
=========== =========== ======== ========= ============
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,401 n/a 1,828,199 45,325,600 (r)
=========== =========== ======== ========= ============
Shares Outstanding...... 6,150,000 43,498,464 n/a 1,828,199 45,326,663
=========== =========== ======== ========= ============
Calculation of Pro Forma
Distributions:
Pro Forma Cash from
Operations from
Statement of Cash
Flows................. $(22,895,361)
Addback Pro Forma
Investments in Notes
Receivable............ $ 42,571,895
------------
Adjusted Pro Forma
Distributions Declared: $ 19,676,534 (s)
============
Pro Forma Wtd. Avg.
Dollars Outstanding.... $906,511,991 (t)
============
Pro Forma Cash
Distributions Declared
per $10,000
Investment............. $ 217 (u)
============
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 $21,919,865(a) $55,049,526 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $21,919,865 $64,106,902 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 2,889,368(a) 6,931,658 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 2,889,368 12,298,325 11,435,228 7,966,916 25,677,829
Operating
Earnings(Losses) Before
Equity in Earnings of
Joint Ventures/Minority
Interests, Gain on Sale
of Properties, and
Provision for Losses on
Properties............. $32,778,080 $19,030,497 $51,808,577 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Other Expenses......... 0 0 0 0 0 0
Provision For Loss on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
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
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $19,030,497 $51,182,905 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Units
Outstanding............ n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,569,158 34,217,377 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 34,757 37,372,684 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Calculation of Pro Forma
Distributions Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows.............
Addback Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable......
Addback Pro Forma
Investments in Notes
Receivable............
Adjusted Pro Forma
Distributions Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL Income
Pro Forma Combined Fund IX, Pro Forma Adjusted
Adjustments APF Ltd. Adjustments Pro Forma
------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned Income............. $ 0 $55,049,526 $2,443,390 $ 91,752 (j) $ 57,584,668
Fees................................. (32,715,768)(b),(c) 3,226,263 0 (32,477)(k) 3,193,786
Interest and Other Income............ 207,144 (d) 32,221,925 61,129 0 32,283,054
------------ ----------- ---------- --------- ------------
Total Revenue........................ $(32,508,624) $90,497,714 $2,504,519 $ 59,275 $ 93,061,508
Expenses:
General and Administrative........... (4,241,719)(e) 15,939,556 198,061 (76,088)(l),(m) 16,061,529
Management and advisory Fees......... (4,658,434)(f) 0 0 0 (n) 0
Fees to Related Parties.............. (2,161,897)(g) 858,787 0 0 858,787
Interest Expense..................... 0 21,498,589 0 0 21,498,589
State Taxes.......................... 0 567,446 14,337 11,375 (o) 593,158
Depreciation--Other.................. 0 199,157 0 0 199,157
Depreciation--Property............... (340,898)(r) 6,590,760 266,273 150,519 (p) 7,007,552
Amortization......................... 2,146,499 (h) 2,310,500 1,500 0 2,312,000
Transaction Costs.................... 0 157,054 19,041 0 176,095
------------ ----------- ---------- --------- ------------
Total Expenses....................... (9,256,449) 48,121,849 499,212 85,806 48,706,867
Operating Earnings(Losses) Before
Equity in Earnings of Joint
Ventures/Minority Interests,
Gain on Sale of Properties, and
Provision for
Losses on Properties................. $(23,252,175) $42,375,865 $2,005,307 $ (26,531) $ 44,354,641
Equity in Earnings of Joint
Venture/Minority Interest........... 0 (14,138) 596,166 (81,670)(q) 500,358
Gain on Sale of Properties........... 0 0 0 0 0
Gain on Securitization............... 0 3,694,351 0 0 3,694,351
Other Expenses....................... 0 0 0 0 0
Provision For Loss on Properties..... 0 (611,534) (314,775) 0 (926,309)
------------ ----------- ---------- --------- ------------
Net Earnings (Losses) Before Benefit/
(Provision) for Federal Income
Taxes................................ (23,252,175) 45,444,544 2,286,698 (108,201) 47,623,041
Benefit/(Provision) for Federal
Income
Taxes............................... 6,898,434 (i) 0 0 0 0
------------ ----------- ---------- --------- ------------
Net Earnings (Losses)................. $(16,353,741) $45,444,544 $2,286,698 $(108,201) $ 47,623,041
============ =========== ========== ========= ============
Earnings Per Share/Unit............... $ n/a $ n/a $ 0.65 $ n/a $ 1.13
============ =========== ========== ========= ============
Book Value Per Share/Unit............. $ n/a $ n/a $ 8.35 $ n/a $ 16.43
============ =========== ========== ========= ============
Dividends Per Share/Unit.............. $ n/a $ n/a $ 0.90 $ n/a $ n/a
============ =========== ========== ========= ============
Ratio of Earnings to Fixed Charges.... n/a n/a n/a n/a 3.16x
============ =========== ========== ========= ============
Wtd. Avg. Units Outstanding........... n/a n/a 3,500,000 n/a n/a
============ =========== ========== ========= ============
Wtd. Avg. Shares Outstanding.......... 6,150,000 40,367,377 n/a 1,828,199 42,195,576 (s)
============ =========== ========== ========= ============
Shares Outstanding.................... 6,150,000 43,522,684 n/a 1,828,199 45,350,883
============ =========== ========== ========= ============
Calculation of Pro Forma Distributions
Declared:
Pro Forma Cash from Operations from
Statement of Cashflows.............. $ 58,799,749
Addback Pro Forma Net Cash Proceeds
from Securitization of Notes
Receivable.......................... (265,871,668)
Addback Pro Forma Investments in
Notes Receivable.................... 288,590,674
------------
Adjusted Pro Forma Distributions
Declared: $ 81,518,755 (t)
============
Pro Forma Wtd. Avg. Dollars
Outstanding.......................... $843,911,506 (u)
============
Pro Forma Cash Distributions Declared
per
$10,000 Investment................... $ 966 (v)
============
</TABLE>
F-27
<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 Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 10,490,297 $ 1,989,688 (a) $ 12,479,985 $ (195,278) $ (73,545) $ (129,428)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 1,548,813 349,465 (b) 1,898,278 39,581 0 0
Amortization expense... 7,368 0 7,368 0 26,238 424,697
Minority interest in
income of consolidated
joint venture......... 7,763 0 7,763 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 23,234 0 23,234 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 215,797 0 215,797 0 0 (73,166)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (82,660) 0 (82,660) (377,933) (242,251) (6,771)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (449,580)
Investment in notes
receivable............ 0 0 0 0 0 (42,571,895)
Collections on notes
receivable............ 0 0 0 0 0 6,417,907
Increase in restricted
cash.................. 0 0 0 0 0 (402,461)
Decrease in due from
related party......... 0 0 0 0 0 55,382
Decrease (increase) in
prepaid expenses...... 27,548 0 27,548 0 1,811 0
Decrease in net
investment in direct
financing leases...... 787,375 0 787,375 0 0 0
Increase in accrued
rental income......... (1,047,421) 0 (1,047,421) 0 0 0
Decrease (increase) in
intangibles and other
assets................ (30,554) 7,942
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 306,277 0 306,277 (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 0 71,853 25,550 0 0
Decrease in accrued
interest.............. 0 0 0 0 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 386,365 0 386,365 0 0 0
Increase (decrease) in
deferred rental
income................ 862,647 0 862,647 0 0 0
------------- ------------ ------------- ----------- --------- -----------
Total adjustments...... 3,114,959 349,465 3,464,424 (1,183,414) (344,708) (37,064,802)
------------- ------------ ------------- ----------- --------- -----------
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)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 0 0 0 0
Additions to land and
buildings on operating
leases................ (77,028,830) (58,749,637)(e) (135,778,467) (31,577) (10,092) 0
Investment in direct
financing leases...... (29,608,346) 0 (29,608,346) 0 0 0
Investment in joint
venture............... (117,662) 0 (117,662) 0 0 0
Acquisition of
businesses............
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 134,981
Investment in mortgage
notes receivable...... (1,388,463) 0 (1,388,463) 0 0 0
Collections on mortgage
note receivable....... 75,010 0 75,010 0 0 0
Investment in notes
receivable............ (1,087,483) 0 (1,087,483) 0 0 0
Collection on notes
receivable............ 239,596 0 239,596 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... 0 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------ ------------- ----------- --------- -----------
Net cash provided by
(used in) investing
activities............ (108,916,178) (58,749,637) (167,665,815) (31,577) (10,092) 134,981
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,735 0 210,735 1,288,673 20,572 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,142,237) 0 (1,142,237) 0 0 0
Payment of stock
issuance costs........ (722,001) 0 (722,001) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 36,587,245 33,656,518 (e) 70,243,763 0 0 49,730,934
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (2,385) (10,291,473)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (8,610) 0 (8,610) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0 0
Distributions to
stockholders.......... (14,237,405) 0 (14,237,405) 0 0 0
Other.................. (200,234) 0 (200,234) 0 0 (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
Cash at beginning of
year................... 123,199,837 0 123,199,837 713,308 962,573 2,526,078
------------- ------------ ------------- ----------- --------- -----------
Cash at end of year..... $ 35,796,119 $(22,753,966) $ 13,042,153 $ 591,712 $ 552,415 $ 4,896,688
============= ============ ============= =========== ========= ===========
</TABLE>
F-28
<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>
Historical
Combining CNL
Pro Forma Income Fund Pro Forma Adjusted
Adjustments Combined APF IX, Ltd. Adjustments Pro Forma
----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(1,194,819)(a) $ 10,866,915 $ 632,462 $ (33,793)(a) $ 11,485,584
Adjustments to reconcile
net income to net cash
provided by
operating activities:
Depreciation........... 0 1,937,859 75,535 37,630 (b) 2,051,024
Amortization expense... 536,625 (c) 994,928 375 0 995,303
Minority interest in
income of consolidated
joint venture......... 0 7,763 0 0 7,763
Equity in earnings of
joint ventures, net of
distributions......... 0 23,234 51,673 20,417 (d) 95,324
Loss (gain) on sale of
land, buildings, and
net investment in
direct
financing leases...... 0 0 (75,997) 0 (75,997)
Provision for loss on
land, buildings, and
direct financing
leases................ 0 142,631 0 0 142,631
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (709,615) 31,891 0 (677,724)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (449,580) 0 0 (449,580)
Investment in notes
receivable............ 0 (42,571,895) 0 0 (42,571,895)
Collections on notes
receivable............ 0 6,417,907 0 0 6,417,907
Increase in restricted
cash.................. 0 (402,461) 0 0 (402,461)
Decrease in due from
related party......... 0 55,382 0 0 55,382
Decrease (increase) in
prepaid expenses...... 0 29,359 (17,219) 0 12,140
Decrease in net
investment in direct
financing leases...... 0 787,375 14,778 0 802,153
Increase in accrued
rental income......... 0 (1,047,421) (8,370) 0 (1,055,791)
Decrease (increase) in
intangibles and other
assets................ 0 (22,612) 0 0 (22,612)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (768,267) 57,354 0 (710,913)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 97,403 (15,775) 0 81,628
Decrease in accrued
interest.............. 0 (362,877) 0 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 0 386,365 38,637 0 425,002
Increase (decrease) in
deferred rental
income................ 0 862,647 0 0 862,647
----------- ------------- ---------- ----------- -------------
Total adjustments...... 536,625 (34,591,875) 152,882 58,047 (34,380,946)
----------- ------------- ---------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (658,194) (23,704,960) 785,344 24,254 (22,895,362)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 2,400,000 0 2,400,000
Additions to land and
buildings on operating
leases................ (135,820,136) (1,641,211) (137,461,347)
Investment in direct
financing leases...... 0 (29,608,346) 0 0 (29,608,346)
Investment in joint
venture............... 0 (117,662) 0 0 (117,662)
Acquisition of
businesses............ (8,227,881)(f) (8,227,881) 0 (2,475,119)(g) (11,140,000)
(437,000)(g)
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 134,981 0 0 134,981
Investment in mortgage
notes receivable...... 0 (1,388,463) 0 0 (1,388,463)
Collections on mortgage
note receivable....... 0 75,010 0 0 75,010
Investment in notes
receivable............ 0 (1,087,483) 0 0 (1,087,483)
Collection on notes
receivable............ 0 239,596 0 0 239,596
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 0 0 0
----------- ------------- ---------- ----------- -------------
Net cash provided by
(used in) investing
activities............ (8,227,881) (175,800,384) 758,789 (2,912,119) (177,953,714)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 1,519,980 0 0 1,519,980
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,142,237) 0 0 (1,142,237)
Payment of stock
issuance costs........ 0 (722,001) 0 0 (722,001)
Proceeds from borrowing
on line of
credit/notes payable.. 0 119,974,697 0 0 119,974,697
Payment on line of
credit/notes payable.. 0 (22,874,147) 0 0 (22,874,147)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (8,610) 0 0 (8,610)
Distributions to
limited partners...... 0 0 (787,501) 0 (787,501)
Distributions to
stockholders.......... 0 (14,237,405) 0 0 (14,237,405)
Other.................. 0 (209,836) 0 0 (209,836)
----------- ------------- ---------- ----------- -------------
Net cash provided by
(used in) financing
activities............ 0 82,300,441 (787,501) 0 81,512,940
Net increase in cash.... (8,886,075) (117,204,903) 756,632 (2,887,865) (119,336,136)
Cash at beginning of
year................... 0 127,401,796 1,287,379 0 128,689,175
----------- ------------- ---------- ----------- -------------
Cash at end of year..... $(8,886,075) $ 10,196,893 $2,044,011 $(2,887,865) $ 9,353,039
=========== ============= ========== =========== =============
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 32,152,408 $ 19,030,497 (a) $ 51,182,905 $10,656,379 $(468,133) $ 427,134
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 4,042,290 2,889,368 (b) 6,931,658 119,923 79,234 0
Amortization expense... 11,808 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
leases................ 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) (2,187,652) 0 0 0
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 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 693,372 0 0 0
------------- ------------ ------------- ----------- ---------- -------------
Total adjustments...... 6,963,867 2,889,368 9,853,235 (3,608,563) 316,963 1,610,591
------------- ------------ ------------- ----------- ---------- -------------
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
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (58,749,637)(e) (258,851,304) (381,671) (236,372) 0
Investment in direct
financing leases...... (47,115,435) (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) (974,696) 0 0 0
Acquisition of
businesses............
Purchase of other
investments........... (16,083,055) (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) (6,281,069) 0 0 0
0 0 0 0 0
Other.................. 0 0 200,000 0 0
------------- ------------ ------------- ----------- ---------- -------------
Net cash provided by
(used in) investing
activities............ (277,338,756) (58,749,637) (336,088,393) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0
0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 33,656,518 (e) 41,348,558 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) (34,073) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0
Distributions to
stockholders.......... (39,449,149) (39,449,149) (9,364,488) 0 0
Other.................. (95,101) (95,101) 0 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
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
============= ============ ============= =========== ========== =============
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Funds IX, Ltd. Adjustments Pro Forma
------------ ------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(16,353,741)(a) $ 45,444,544 $2,286,698 $ (108,201)(a) $ 47,623,041
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... (340,898)(b) 6,789,917 266,273 150,519 (b) 7,206,709
Amortization expense... 2,146,499 (c) 4,460,583 1,500 4,462,083
Minority interest in
income of consolidated
joint venture......... 30,156 0 30,156
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 142,378 81,670 (d) 208,608
Loss (gain) on sale of
land, building, net
investment in direct
leases................ 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 1,009,576 314,775 1,324,351
Gain on
securitization........ (3,356,538) 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 265,871,668 0 265,871,668
Decrease (increase) in
other receivables..... (2,543,413) 2,565 (2,540,848)
Increase in accrued
interest income
included in notes
receivable............ (170,492) 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0
Investment in notes
receivable............ (288,590,674) 0 (288,590,674)
Collections on notes
receivable............ 23,539,641 0 23,539,641
Decrease in restricted
cash.................. 2,504,091 0 2,504,091
Decrease (increase) in
due from related
party................. (953,688) 0 (953,688)
Increase in prepaid
expenses.............. 7,246 739 7,985
Decrease in net
investment in direct
financing leases...... 1,971,634 92,647 2,064,281
Increase in accrued
rental income......... (2,187,652) 209,852 (1,977,800)
Increase in intangibles
and other assets...... (154,351) 0 (154,351)
Increase (decrease) in
accounts payable,
accrued expenses and
other
liabilities........... 846,680 (39,956) 806,724
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. (133,364) 19,568 (113,796)
Increase in accrued
interest.............. (77,968) 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 (43,649) 393,194
Decrease in deferred
rental income......... 693,372 0 693,372
------------ ------------- ---------- ----------- -------------
Total adjustments...... 1,805,601 9,977,827 966,692 232,189 11,176,708
------------ ------------- ---------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (14,548,140) 55,422,371 3,253,390 123,988 58,799,749
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 0 2,385,941
Additions to land and
buildings on operating
leases................ (259,469,347) 0 (259,469,347)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435)
Investment in joint
venture............... (974,696) 3,605 (971,091)
Acquisition of
businesses............ (8,227,881)(f) (8,227,881) (2,475,119)(g) (11,140,000)
(437,000)(g)
Purchase of other
investments........... (16,083,055) 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 295,514 0 295,514
Proceeds from retained
interest and
securities, excluding
investment
income................ 212,821 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648)
Collections on mortgage
note receivable....... 291,990 0 291,990
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750)
Collections on
equipment notes
receivable............ 3,046,873 0 3,046,873
Decrease in restricted
cash.................. 0 0 0
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069)
0 0 0
Other.................. 200,000 0 200,000
------------ ------------- ---------- ----------- -------------
Net cash provided by
(used in) investing
activities............ (8,227,881) (342,442,742) 3,605 (2,912,119) (345,351,256)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 386,592,011 0 386,592,011
Contributions from
limited partners...... 0 0 0
0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925)
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 455,102,478 0 455,102,478
Payment on line of
credit/notes payable.. (411,813,826) 0 (411,813,826)
Retirement of shares of
common stock.......... (639,528) 0 (639,528)
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073)
Distributions to
limited partners...... 0 (3,220,004) (3,220,004)
Distributions to
stockholders.......... (48,813,637) 0 (48,813,637)
Other.................. (2,595,088) 0 (2,595,088)
------------ ------------- ---------- ----------- -------------
Net cash provided by
(used in) financing
activities............ 0 338,643,762 (3,220,004) 0 335,423,758
Net increase (decrease)
in cash................ (22,776,021) 51,623,391 36,991 (2,788,131) 48,872,251
Cash at beginning of
year................... 49,829,130 1,250,388 51,079,518
------------ ------------- ---------- ----------- -------------
Cash at end of year..... (22,776,021) 101,452,521 $1,287,379 $(2,788,131) $ 99,951,769
============ ============= ========== =========== =============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of 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 Income Fund. This unaudited pro forma financial
information has been prepared utilizing the historical financial statements of
APF and the historical combined financial information of the Advisor, CNL
Restaurant Financial Services Group and the Income Fund and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, the Advisor the CNL Restaurant Financial Services Group and the Income
Fund. The Pro Forma Balance Sheet was prepared as if the transactions described
above occurred on 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 Fund 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 Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
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-32
<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 Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- -------------- ----------------
<S> <C> <C> <C> <C>
Shares Offered.......... 3,800,000 2,350,000 1,828,198.55 7,978,198.55
Exchange Value.......... $ 20 $ 20 $ 20 $ 20
----------- ----------- -------------- ----------------
Share Consideration..... $76,000,000 $47,000,000 $36,563,971 $1459,563,971
Cash Consideration...... -- -- 437,000 437,000
APF Transaction Costs... 5,083,894 3,143,987 2,475,119 10,703,000
----------- ----------- -------------- ----------------
Total Purchase
Price.............. $81,083,894 $50,143,987 $39,476,090 $ 170,703,971
=========== =========== ============== ================
Allocation of Purchase
Price:
Net Assets--Historical.. $ 7,141,252 $10,006,878 $29,058,879 $ 46,207,009
Purchase Price Adjust-
ments:
Land and buildings on
operating leases..... 8,110,527 8,110,527
Net investment in
direct financing
leases............... 2,069,383 2,069,383
Investment in joint
ventures............. 1,434,178 1,434,178
Accrued rental in-
come................. (1,163,425) (1,163,425)
Intangibles and other
assets............... (2,792,876) (33,452) (2,826,328)
Goodwill*............. 42,929,985 -- 42,929,985
Excess purchase
price................ 73,942,642 -- -- 73,942,642
----------- ----------- -------------- ----------------
Total Allocation.... $81,083,894 $50,143,987 $34,476,090 $ 170,703,971
=========== =========== ============== ================
</TABLE>
- --------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $10,703,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess purchase
price paid for the Advisor to a related party of $74,942,642 was expensed at
March 31, 1999 because the Advisor has not been deemed to qualify as a
"business" for purposes of applying APB Opinion No. 16, "Business
Combinations". Goodwill of 42,929,985 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 Earn-
ings.......... 3,277,060
Accumulated
distributions
in excess of
earnings...... 74,942,642
Goodwill for
CFC (Intangi-
bles and other
assets)....... 42,929,985
CFC/CFS Org
Costs/Other
Assets...... 2,792,876
Cash to pay
APF transac-
tion costs.. 8,227,881
APF Common
Stock....... 61,500
APF APIC..... 122,938,500
(To record ac-
quisition of
CFA, CFS and
CFC)
2.Partners Capi-
tal............. 29,058,879
Land and build-
ings on oper-
ating leases.. 8,110,527
Net investment
in direct fi-
nancing
leases........ 2,069,383
Investment in
joint ven-
tures......... 1,434,178
Accrued
rental in-
come........ 1,163,425
Intangibles
and other
assets...... 33,452
Cash to pay
APF Transac-
tion costs.. 2,475,119
Cash consid-
eration to
Income
Fund........ 437,000
APF Common
Stock....... 18,282
APF APIC..... 36,545,689
(To record ac-
quisition of
the Income
Fund)
</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 Income Fund of $8,412 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, 1999.
(a) Represents rental and earned income of $2,339,153 and depreciation
expense of $394,465 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.
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates......................... $ (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 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
</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>
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $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)
<TABLE>
<S> <C>
Amortization of goodwill..................................... $536,625
</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 $22,938 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................. $ 0
Reimbursement of administrative costs....................... (15,218)
--------
$(15,218)
========
</TABLE>
(l) Represents the elimination of $15,218 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $8,862 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $7,546 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through May 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 Fund 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 $37,630 as a
result of adjusting the historical basis of the real estate wholly
owned by the Income Fund to fair value as a result of accounting
for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings is
being depreciated using the straight-line method over the remaining
useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $20,417 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 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.
(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.
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................ $ (1,773,406)
Secured equipment lease fees............................ (54,998)
Advisory fees........................................... (305,030)
Reimbursement of administrative costs................... (408,762)
Acquisition fees........................................ (21,794,386)
Underwriting fees....................................... (388,491)
Administrative, executive and guarantee fees............ (1,233,043)
Servicing fees.......................................... (1,570,331)
Development fees........................................ (229,153)
Management fees......................................... (1,851,004)
------------
Total................................................. $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the year ended
December 31, 1998, which were deferred for pro forma purposes as
described in 5(II)(c). These deferred loan origination fees are
being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income............................................... $207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs......................... $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees.......................................... $(1,851,004)
Administrative executive and guarantee fees.............. (1,233,043)
Servicing fees........................................... (1,269,357)
Advisory fees............................................ (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(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.
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4)
<TABLE>
<S> <C>
Amortization of goodwill................................... $2,146,499
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $91,752 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................. $ 0
Reimbursement of administrative costs....................... (32,477)
--------
$(32,477)
========
</TABLE>
(l) Represents the elimination of $32,477 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $43,611 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $11,375 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1998 through 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 Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
(p) Represents an increase in depreciation expense of $150,519 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Income Fund through joint venture or tenancy in
common arrangements with affiliates or unrelated third parties, to
fair value as a result by the Income Fund to fair value as a result
of accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $81,670 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(r) 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 from the pro forma statement of cash flows.
(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.
F-40
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Concluded)
(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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non-Cash Investing Activities:
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B)
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the use of amounts borrowed under APF's credit facility
and the use of cash to 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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
F-41
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund IX, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund IX, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
A-1
<PAGE>
(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
A-2
<PAGE>
Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
A-3
<PAGE>
Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among by and among CNL American Properties Fund,
Inc., a Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware
limited partnership (the "Operating Partnership"), CNL APF GP corp., a Delaware
corporation (the "OP General Partner"), CNL Income Fund IX, Ltd., a Florida
limited partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr.,
and CNL Realty Corporation, a Florida corporation (together with Messrs. Borne
and Seneff, (the "General Partners"). APF, the Operating Partnership, the OP
General Partner, the Fund and the General Partners are referred to collectively
herein as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund will
be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. AMENDMENTS TO MERGER AGREEMENT
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2 (ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against
the Merger and affirmatively elect the note option, such limited partners
shall be entitled to receive, in lieu of the Share Consideration, notes
(the "Notes") in the aggregate amount equal to 97% of the value (based on
the Exchange Value as defined in the Registration Statement) of the Share
Consideration such Dissenting Partners would have otherwise received had
such partners not elected to receive the Notes (the "Note Option"). The
Notes will mature on the fifth anniversary of the Closing Date and will
bear interest at a fixed rate equal to seven percent. The aggregate Share
Consideration shall be reduced on a one-for-basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners
not elected the Note Option."
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1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
1.6 The following subsection shall be added to Section 10.2.
"(g) The aggregate face amount of the Notes to be issued to Dissenting
Limited Partners shall not have exceeded 15% of the value of the Share
Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. GENERAL
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will constitute
one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or interpretation
of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any choice or
conflict of law provision or rules (whether of the State of Florida or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
By: ____________________________
James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
By: ____________________________
Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
By: ____________________________
Robert A. Bourne
Its: President
CNL INCOME FUND IX, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
By: ____________________________
James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
By: ____________________________
James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
_________________________________
Robert A. Bourne, as General
Partner
/s/ James M. Seneff, Jr.
_________________________________
James M. Seneff, Jr., as General
Partner
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund IX, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
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"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 3,700,097 fully paid and nonassessable APF Common
Shares (1,850,049 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $33,776,342, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OP
General Partner and the Operating Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 57,299,903 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 3,500,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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<PAGE>
will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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<PAGE>
from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $3,700,097 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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<PAGE>
transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $370,010 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
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 IX, 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
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<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND X, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund X Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly-owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999 and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
to each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties on a triple-net
basis, APF has the ability to offer a complete range of restaurant property
services to operators of national and regional restaurant chains, from triple-
net leasing and mortgage financing to site selection, construction management
and build-to-suit development. If APF acquires all of the Income Funds in the
Acquisition, APF expects to have total assets of approximately $1.5 billion at
the time of the consummation of the Acquisition and will be one of the largest
triple-net lease REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 2,121,622 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is uncertain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for trading on
the NYSE. We do not know the value at which an APF Share will trade on the NYSE
upon listing.
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It is possible that the APF Shares will trade at prices substantially below the
exchange value. APF has, however, recently sold $750 million of APF Shares
through three public offerings. In each offering, the offering price per APF
Share, after giving effect to the one-for-two stock split, equaled the exchange
value. The offering price was determined by APF based upon the estimated costs
of investing in restaurant properties and making mortgage loans, the fees to be
paid to CNL Fund Advisors, Inc. and its affiliates, as well as fees to third
parties and the expenses of the offerings. At March 31, 1999, APF has invested
all of the net offering proceeds to acquire restaurant properties, to make
mortgage loans and to pay fees and other expenses.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the Acquisition?
There are a number of material risks and considerations that you should
consider, including:
. We are uncertain as to the value at which APF Shares will trade following
listing.
. We have material conflicts in light of our being both general partners of
the Income Funds and members of APF's Board of Directors.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. As stated below, the Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote against the
Acquisition.
Did you receive a fairness opinion in connection with APF's acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
with respect to the fairness, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the colored
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your Units may be voted "For" or "Against" APF's acquisition of your
Income Fund. If you prefer, you may instead vote by telephone, following the
instructions on your consent form. If you sign and send in your consent form
and do not indicate how you want to vote, your consent form will be counted as
a vote "For" the Acquisition. If you do not vote or you abstain from voting, it
will count as a vote "Against" the Acquisition.
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In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2004 in an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only receive the notes option if you vote
"Against" the Acquisition, and you elect to receive notes on your consent form.
You will receive APF Shares if your Income Fund elects to be acquired in the
Acquisition and you vote "For" the Acquisition, or you vote "Against" the
Acquisition and do not affirmatively select the notes option on your consent
form. In addition, if Limited Partners in your Income Fund elect to receive
notes in an amount greater than 15% of the estimated value of APF Shares, based
on the exchange value, to be paid to your Income Fund, then APF has the right
to decline to acquire your Income Fund. The notes will not be listed on any
exchange or automated quotation system, and a market for the notes will not
likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
the tax that you must pay will generally be based on the difference between the
value of the APF Shares you receive and the tax basis of your units. If you
elect to receive notes, your tax will be based upon your allocable share of the
gain which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Some of
the gain may be subject to the 25% rate of tax applicable to certain types of
real property gain.
We urge you to consult with your tax advisor to evaluate the taxes that will be
incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $1,673. To
review the tax consequences to the Limited Partners of the Income Funds in
greater detail, see pages 180 through 194 of the consent solicitation and
"Federal Income Tax Considerations" in this supplement.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds acquired by
APF may be differently constructed, located in a different geographic area or
of a different restaurant chain than the restaurant properties owned by your
Income Fund. Because the market for real estate may vary from one region of the
country to another, the change in geographic diversity may expose you to
different and greater risks than those to which you are presently exposed. For
geographic information regarding APF's and the Income Funds' restaurant
properties, see "APF's Business and The Restaurant Properties--Business
Objectives and Strategies" and "--The Restaurant Properties--General" and
"Business of the Income Funds--Description of Restaurant Properties" in the
consent solicitation.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund. This description is qualified in its entirety
by the more detailed discussion in the section entitled "Risk Factors"
contained in the consent solicitation.
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Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease below the exchange value upon listing.
Your Income Fund will be receiving 2,121,622 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices substantially below
the exchange value or the historical per share book value of the assets of APF.
The APF Shares have been approved for listing on the NYSE, subject to official
notice of issuance. Prior to listing, the existing APF stockholders have not
had an active trading market in which they could sell their APF Shares.
Additionally, any Limited Partners of the Income Funds who become APF
stockholders as a result of the Acquisition, will have transformed their
investment in non-tradable units into an investment in freely tradable APF
Shares. Consequently, some of these stockholders may choose to sell their APF
Shares upon listing at a time when demand for APF Shares may be relatively low.
The market price of the APF Shares may be volatile after the Acquisition, and
the APF Shares could trade at prices substantially less than the exchange value
as a result of increased selling activity following the issuance of the APF
Shares, the interest level of investors in purchasing the APF Shares after the
Acquisition and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund made $910, $920, and $900, respectively, in distributions, per $10,000
investment to you. While historically, APF has made distributions equal to
7.625% per APF Share, based on the exchange value, we cannot be sure that APF
will be able to maintain this level of distributions in the future. In the
event that APF is unable to maintain this level of distributions in the future,
your distributions per $10,000 investment may decrease substantially after the
Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have two material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne, have a different interest in the completion of the Acquisition
which may conflict with your interest as a Limited Partner of the Income Fund
or with their own positions as the general partners of your Income Fund.
Second, assuming only your Income Fund is acquired in the Acquisition, we will
receive 19,486 APF Shares. Finally, in the event that your Income Fund is not
acquired, however, we may be required, as general partners of your Income Fund,
to pay all or a substantial portion of the Acquisition costs allocated to your
Income Fund to the extent that you or other Limited Partners of your Income
Fund vote against the Acquisition. For additional information regarding the
Acquisition costs allocated to your Income Fund, see "Comparison of Alternative
Effect on Financial Condition and Results of Operations" contained in this
supplement.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own and lease on a triple-net basis, on the date that the Acquisition
is consummated, assuming only your Income Fund was acquired as of March 31,
1999, 562 restaurant properties. The risks inherent in investing in an
operating company such as APF include that
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APF may invest in new restaurant properties that are not as profitable as APF
anticipated, may incur substantial indebtedness to make future acquisitions of
restaurant properties which it may be unable to repay and may make mortgage
loans to prospective operators of national and regional restaurant chains which
may not have the ability to repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through sale of your APF Shares, not from
liquidation proceeds from restaurant properties. Continuation of your Income
Fund would, on the other hand, permit you eventually to receive liquidation
proceeds, if any, from the sale of the Income Fund's restaurant properties, and
your share of these sale proceeds could be higher than the amount realized from
the sale of your APF Shares or from the combination of cash paid to and
payments on any notes if you elect to receive the notes.
Real Estate/Business Risk
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default 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. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
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APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to Fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
March 31, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.62x and its ratio of debt-to-total assets was
28.01%. If only your Income Fund were acquired as of that date, APF's debt
service ratio would have been 3.79x and its ratio of debt-to-total assets would
have been 26.91%. Up through the time immediately prior to the consummation of
the Acquisition, as a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former limited partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgages. APF
typically does not require that a third party guarantee the obligations of the
tenant or the borrower. The ability of the tenants or borrowers to pay their
obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their business. Various factors, many of
which are beyond the control of a restaurant chain, may adversely affect the
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economic viability of the restaurant chain, including but not limited to : (1)
national, regional and local economic conditions which may be adversely
affected by industry slowdowns, employer relocations, prevailing employment
conditions and other factors, and which may reduce consumer demand for the
products offered by APF's customers; (2) local real estate conditions; (3)
change or weaknesses in specific industry segments; (4) perceptions by
prospective customers of the safety, convenience, services and attractiveness
of the restaurant chain; (5) changes in demographics consumer tastes and
traffic patterns; (6) the ability to obtain and capable management; (7) changes
in laws, building codes, similar ordinances and other legal requirements,
including laws increasing the potential liability for environmental conditions
existing on properties; (8) the inability of a particular restaurant chain's
computer system, or that of its franchisor or vendors, to adequately address
Year 2000 issues; (9) increases in operating expenses; and (10) increases in
minimum wages, taxes, including income, service, real estate and other taxes,
or mandatory employee benefits.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as a stockholder, would be reduced substantially for
each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to certain adjustments that are unique to REITs, a REIT generally
must distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
For a more detailed discussion of the risks associated with the Acquisition,
see "Risk Factors" in the consent solicitation.
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CONSIDERATION PAID TO INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth information regarding the estimated value of
the consideration that your Income Fund will receive in the Acquisition. The
APF Shares payable to your Income Fund will not change if APF acquires fewer
than all of the Income Funds in the Acquisition. This data assumes that none of
the Limited Partners of your Income Fund have elected to receive the notes. You
should note that the APF Shares may trade at prices substantially below the
exchange value upon listing on the NYSE.
<TABLE>
<CAPTION>
Original Original Limited
Limited Partner Investments Estimated Value
Partner Less Any Estimated of APF Shares
Investments Distributions of Estimated Value of per
Less Any Net Sales Proceeds Number of Value of APF Shares Average $10,000
Distributions per $10,000 APF Shares APF Shares Estimated after Original
of Net Sales Original Offered to Payable to Acquisition Acquisition Limited Partner
Proceeds(1) Investment(1) Income Fund Income Fund Expenses Expenses Investment
- ------------- ------------------- ----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$40,000,000 $10,000 2,121,622 $42,432,440 $481,000 $41,951,440 $10,390
</TABLE>
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(1) Income Fund has had no distributions of net sales proceeds.
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2004. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2004. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest. For more detailed information, see "The Acquisition" and
"Description of the Notes" in the consent solicitation.
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
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The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1)................................................ $ 24,086.00
Appraisals and Valuation(2).................................. 7,750.00
Fairness Opinions(3)......................................... 30,000.00
Solicitation Fees(4)......................................... 19,267.00
Printing and Mailing(5)...................................... 125,653.00
Accounting and Other Fees(6)................................. 51,237.00
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Subtotal............................................... 257,993.00
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(7).................... 102,319.00
Legal Closing Fees(8)........................................ 50,540.00
Partnership Liquidation Costs(9)............................. 70,148.00
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Subtotal............................................... 223,007.00
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Total........................................................ $481,000.00
===========
</TABLE>
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(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $312,063. Your Income
Fund's pro-rata portion of these fees was determined based on the
percentage of the value of the APF Share consideration payable to your
Income Fund, based on the exchange value, to the total value of the APF
Share consideration payable to all of the Income Funds, based on the
exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the Income
Funds in connection with the Acquisition were $105,420. Your Income Fund's
pro-rata portion of these fees was determined based on number of restaurant
properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and incurred a
fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $249,626. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $1,610,399. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
(6) Aggregate accounting and other fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $683,904. Your Income
Fund's pro-rata portion of these fees was determined based on the
percentage of your Income Fund's total assets as of March 31, 1999 to the
total assets of all of the Income Funds as of March 31, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by all of
the Income Funds in connection with the Acquisition is estimated to be
$1,312,808. Your Income Fund's pro-rata portion of these fees was
determined based on the percentage of the value of the APF Share
consideration payable to your Income Fund, based on the exchange value, to
the total value of the APF Share consideration payable to all of the Income
Funds, based on the exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,454. Your Income
Fund's pro-rata portion of these fees was determined based on the
percentage of your Income Fund's total assets as of March 31, 1999 to the
total assets of all of the Income Funds as of March 31, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of the Income
Funds in connection with the Acquisition is estimated to be $895,326. Your
Income Fund's pro-rata portion of these costs was determined based on the
percentage of the value of the APF Share consideration payable to your
Income Fund, based on the exchange value, to the total value of the APF
Share consideration payable to all of the Income Funds, based on the
exchange value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
S-9
<PAGE>
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of
80% or more in value of your Income Fund's restaurant properties acquired
within two years of the initial date of the prospectus (September 1991).
Because the Acquisition of your Income Fund is a "Liquidating Sale" within the
meaning of the partnership agreement, it may not be consummated without the
approval of Limited Partners representing greater than 50% of the outstanding
units.
Consequence of Failure to Approve the Acquisition
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding Units do not vote "For" the Acquisition, the Acquisition may
not be consummated under the terms of the partnership agreement. In such event,
we plan to continue to operate your Income Fund as a going concern and to
eventually dispose of your Income Fund's restaurant properties approximately 7
to 12 years after they were acquired or as soon thereafter if, in our opinion,
market conditions permit, as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at
. We and members of APF's management
intend to solicit actively your support for the Acquisition and would like to
use the special meeting to answer questions about the Acquisition and the
solicitation materials and to explain in person our reasons for recommending
that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain their votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning on attending the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about ,
1999 and will continue until the later of (a) , 1999 a date not less than
60 calendar days from the initial delivery of the solicitation materials, or
(b) such later date as we may select and as to which we give you notice. At our
discretion, we may elect to extend the solicitation period. Under no
circumstances will the solicitation period be extended beyond March 31, 2000.
Any consent form received by Corporate Election Services prior to 5:00 p.m.,
Eastern time, on the last day of the solicitation
S-10
<PAGE>
period will be effective provided that such consent form has been properly
completed and signed. If you fail to return a signed consent form by the end of
the solicitation period, your units will be counted as voting "Against" the
Acquisition of your Income Fund and you will receive APF Shares if your Income
Fund is acquired. If you prefer, you may instead vote by telephone according to
the instructions on your consent form.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
S-11
<PAGE>
During the years ended December 31, 1996, 1997 and 1998 and the quarter
ended March 31, 1999, the aggregate amounts accrued or paid by your Income Fund
to us are shown below under "Historical Distributions Paid to the General
Partners and Affiliates" and the estimated amounts of compensation that would
have been paid had the Acquisition been in effect for the periods presented,
are shown below under "Pro Forma Distributions to be Paid to the General
Partners following the Acquisition":
<TABLE>
<CAPTION>
Year Ended December 31, Quarter Ended
------------------------ March 31,
1996 1997 1998 1999
------- ------- -------- -------------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the
General Partners and Affiliates:
General Partner Distributions........ -- -- -- --
Accounting and Administrative
Services............................ $94,496 $87,967 $105,445 $29,184
Broker/Dealer Commissions............
Due Diligence and Marketing Support
Fee................................. -- -- -- --
Acquisition Fees.....................
Asset Management Fees................
Real Estate Disposition Fees(1)......
------- ------- -------- -------
Total historical................... $94,496 $87,967 $105,445 $29,184
Pro Forma Distributions to be Paid to
the General Partners following the
Acquisition:
Cash Distributions on APF Shares..... $29,221 $22,486 $ 37,649 $ 8,455
Salary Compensation.................. -- -- -- --
------- ------- -------- -------
Total pro forma.................... $29,221 $22,486 $ 37,649 $ 8,455
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to certain minimum
returns to the Limited Partners. To date, no such fees have been paid since
the required minimum returns have not been made to the Limited Partners.
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
contained herein under the caption "Financial Statements" and in the consent
solicitation under the caption "Summary--Our Reasons for supporting the
Acquisition--Prices for Income Fund Units."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31, 1999
------------------------ --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income....... $906 $879 $857 $874 $464 $174 $132
Distributions from Return of
Capital(1)..................... -- 31 53 46 436 51 93
---- ---- ---- ---- ---- ---- ----
Total......................... $906 $910 $910 $920 $900 $225 $225
==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from certain non-cash
items. This amount is not required to be presented as a return of capital
except for purposes of this table, and the Income Fund has not treated this
amount as a return of capital for any other purpose.
S-12
<PAGE>
Cash distributions for the year ended December 31, 1997 include $80,000 of
amounts earned in 1997, but declared payable in the first quarter of 1998.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses during 1999. Thus, the pro forma information regarding
the distributions to APF stockholders for the quarter ended March 31, 1999 is
not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the Acquisition
with those of several alternatives, the Acquisition is more economically
attractive to you and the other Limited Partners than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to certain closing conditions. Second, if your Income Fund is acquired,
all Limited Partners of your Income Fund who vote against the Acquisition will
be given the option of receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others, that we will be relieved
from certain ongoing liabilities with respect to the Income Fund if it is
acquired by APF. For a further discussion of the conflicts of interest and
potential benefits of the Acquisition to us, see "Conflicts of Interest" below.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the values of the
consideration which would have been received by
S-13
<PAGE>
you and the other Limited Partners in alternative transactions and concluded
that the Acquisition is fair based on such comparison. In addition, we believe
the Acquisition is the best way to maximize the return on your investment
because of your ability to participate in the potential appreciation of APF
Shares. Since the investment in your Income Fund is an investment in a static
portfolio due to the restrictions contained in your Income Fund's partnership
agreement and limited capital resources your investments have less of an
opportunity to appreciate. Because APF is a growth-oriented operating company,
you will have the opportunity, as an APF stockholder, to participate in APF's
future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinions of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinions of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., an affiliate of CNL Group, Inc., and (3) Valuation
Associates has previously performed valuation appraisals for APF. See "Reports,
Opinions and Appraisals" in the consent solicitation.
On rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to, any other
aspect of the Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition or
the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Legg Mason's opinion also does not compare the relative merits of the
Acquisition with those of any other transaction or business strategy which were
or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares will exceed the going concern value and
liquidation value of your Income Fund.
S-14
<PAGE>
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Net Book Value of the Income Fund. We calculated the book value of your
Income Fund under generally accepted accounting principles, or GAAP, as of
March 31, 1999 per average $10,000 original investment. Since the calculation
of the book value was done on a GAAP basis, it is primarily based on historical
cost and, therefore, it is not indicative of the true fair market value of your
Income Fund. This figure was compared to three other figures:
(1) the value of the Income Fund if it commenced an orderly liquidation of
its investment portfolio on December 31, 1998,
(2) the value of the Income Fund if it continued to operate in accordance
with its existing partnership agreement and business plans, and
(3) the estimated value of the APF Shares, based on the exchange value, paid
to each Income Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Original Estimated Value
Limited Partner of APF Shares per
Investments Less GAAP Going Average $10,000
any Distributions Book Liquidation Concern Original Limited
of Sales Proceeds(1) Value Value(2) Value(2) Partner Investment
-------------------- ------ ----------- -------- -------------------
<S> <C> <C> <C> <C> <C>
CNL Income Fund X, Ltd.. 10,000 $8,288 $9,645 $10,349 $10,390
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
(2) Liquidation and going concern values were based on appraisals prepared by
Valuation Associates. For a complete description of the methodologies
employed by Valuation Associates, see "Reports, Opinions and Appraisals" in
the consent solicitation.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have contractual
obligations pursuant to your Income Fund's partnership agreement as well as
state law to assess whether the terms of the Acquisition are fair and equitable
to the Limited Partners of your Income Fund without regard to whether the
Acquisition is fair and equitable to any of the other participants, including
the Limited Partners in other Income Funds. James M. Seneff, Jr. and Robert A.
Bourne act as the individual general partners of all of the Income Funds and
also as members of the Board of Directors of APF. While Messrs. Seneff and
Bourne have sought faithfully to discharge their obligations to your Income
Fund, there is an inherent conflict of interest in serving, directly or
indirectly, in a similar capacity with respect to your Income Fund and also on
APF's Board of Directors.
Lack of Independent Representation
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If and
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
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<PAGE>
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We have
been the parties responsible for structuring all the terms and conditions of
the Acquisition, Legal counsel engaged to assist with the preparation of the
documentation for the Acquisition, including this consent solicitation, was
engaged by us and did not serve, or purport to serve, as legal counsel for the
Income Funds or Limited Partners. If and independent representative had been
retained for the Income Funds, the terms of the Acquisition may have been
different and possibly more favorable to the Limited Partners. In particular,
had separate representation for each of the Income Funds been arranged by us,
issues unique to the value of each of the specific Income Funds might have been
highlighted or received greater attention, resulting in adjustments to the
value assigned to the assets of such Income Funds and increasing the number of
APF Shares or notes that would be allocable to such Income Fund if acquired in
the Acquisition.
Substantial Benefits to General Partners
As a result of the Acquisition assuming only your Income Fund is acquired,
we are expected to receive three material benefits. These benefits include:
. With respect to our ownership in your Income Fund, we may be issued up to
19,486 APF Shares in the aggregate in accordance with the terms of your
Income Fund's partnership agreement. The 19,486 APF Shares issued to us
will have an estimated value, based on the exchange value, of
approximately $389,720.
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr. Seneff
serving as Chairman of APF and Mr. Bourne serving as Vice Chairman.
Furthermore, they will be entitled to receive performance-based
incentives, including stock options under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of the Income Funds, we are legally liable for all of
Income Funds liabilities to the extent that the Income Funds are unable
to satisfy such liabilities. Because the partnership agreement for each
Income Fund prohibits the Income Funds from incurring indebtedness, the
only liabilities the Income Funds have are liabilities with respect to
their ongoing business operations. In the event that one or more Income
Funds are acquired by APF, we world be relieved of our legal obligation
to satisfy the liabilities of the acquired Income Fund or Income Funds.
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Certain Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund. If
your Income Fund is acquired by APF, and you have voted "For" the Acquisition,
you will receive APF Shares. If you have voted "Against" the Acquisition but
your Income Fund is acquired by APF, you may elect to receive notes.
S-16
<PAGE>
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under certain circumstances, even
if APF were to make the same level of distributions as your Income Fund, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you. For certain other differences attributable to APF's status as a REIT,
see "--Taxation of APF" and "--Taxation of Stockholders--Taxable Domestic
Stockholders" in the consent solicitation.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF, the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or Notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain and loss based on the
exchange value, for an average $10,000 original Limited Partner investment in
your Income Fund, is set forth in the table below for those Limited Partners
subject to federal income taxation.
<TABLE>
<CAPTION>
Estimated Gain/(Loss)
per Average $10,000
Original Limited
Partner Investment(1)
---------------------
<S> <C>
CNL Income Fund X, Ltd................................... $1,673
</TABLE>
- --------
(1) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be at prices significantly below the exchange value.
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one more individuals or entities in exchange for the stock of that corporation,
and (2) immediately after the exchange, such individuals or entities are in
control of the corporation. For purposes of section 351(a), control is defined
as the ownership of stock possessing at least 80 percent of the total combined
voting power of all classes of stock entitled to vote and at least 80 percent
of the total number of shares of all other classes of stock of the corporation.
APF has represented to Shaw Pittman,
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<PAGE>
APF's tax counsel, that, following the Acquisition, the Limited Partners of the
Income Funds will not own stock possessing at least 80 percent of the total
combined voting power of all classes of APF stock entitled to vote and at least
80 percent of the total number of shares of all other classes of APF stock.
Based upon this representation, Shaw Pittman has opined that the Acquisition
will not result in the acquisition of control of APF by the Limited Partners
for purposes of section 351(a). Accordingly, the transfer of assets will result
in recognition of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if
any, assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2004, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares, or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," (which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses that
you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into
S-18
<PAGE>
account his, her or its share of your Income Fund's gain as determined under
the partnership agreement of your Income Fund. Therefore, Limited Partners who
elect the notes may recognize gain in the year of the Acquisition despite the
fact that they will not receive cash with which to pay the tax on the gain.
Such Limited Partners will adjust the basis of the notes as described below,
and the resulting increase in basis will decrease the amount of the gain
recognized over the term of the notes by the Limited Partners electing to
receive notes. See "--Tax Consequences of Liquidation and Termination of Your
Income Fund" below.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition: including gain or loss resulting from the Acquisition. If
your taxable year is not the calendar year, you could be required to recognize
as income in a single taxable year your share of your Income Fund's income
attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units. Your holding period for
the Notes for purposes of determining capital gain or loss from the disposition
of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17) or
(20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the Notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
For a discussion of the taxation of APF, see "Federal Income Tax
Considerations--Taxation of APF" in the consent solicitation.
S-19
<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 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 2,307,364 1,391,466 8,137 (2,450,663)(b),(c)
Interest and
Other Income..... 2,214,763 0 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 0 1,095,269 2,563,714 1,323,577 64,186 (377,734)(e)
Management and
Advisory Fees.... 697,364 0 697,364 0 0 611,196 (1,308,560)(f)
Fees to Related
Parties.......... 0 0 0 23,326 292,575 0 (292,786)(g)
Interest
Expense.......... 0 0 0 50,730 0 4,769,268 0
State Taxes...... 235,208 0 235,208 0 0 0 0
Depreciation--
Other............ 0 0 0 39,581 26,238 0 0
Depreciation--
Property......... 1,548,813 349,465(a) 1,898,278 0 0 0 0
Amortization..... 7,368 0 7,368 0 0 0 535,335 (h)
Transaction
Costs............ 125,926 0 125,926 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
Total Expenses.. 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650 (1,443,745)
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) $ (944,850)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 0 17,271 0 0 0 0
Gain on Sale of
Properties....... 0 0 0 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 (215,797) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
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) (944,850)
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) $(1,193,529)
=========== ========== =========== ========== ========== ========== ===========
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund X, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ----------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $14,523,161 $ 725,315 $ 66,794 (j) $15,315,270
Fees............. 1,256,304 0 ( 11,668)(k) 1,244,636
Interest and
Other Income..... 7,687,325 13,714 0 7,701,039
------------ ----------- ------------------ ------------
Total Revenue... $23,466,790 $739,029 $ 55,126 $24,260,945
Expenses:
General and
Administrative... 4,669,012 72,131 ( 29,663)(l),(m) 4,711,480
Management and
Advisory Fees.... 0 0 0 (n) 0
Fees to Related
Parties.......... 23,115 0 0 23,115
Interest
Expense.......... 4,819,998 0 0 4,819,998
State Taxes...... 235,208 14,577 8,653 (o) 258,438
Depreciation--
Other............ 65,819 0 0 65,819
Depreciation--
Property......... 1,898,278 72,294 39,234 (p) 2,009,806
Amortization..... 542,703 0 0 542,703
Transaction
Costs............ 125,926 33,661 0 159,587
------------ ----------- ------------------ ------------
Total Expenses.. 12,380,059 192,663 18,224 12,590,946
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties, and
Provision for
Losses on
Properties....... $11,086,731 $ 546,366 $ 36,902 $11,669,999
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 79,525 (14,244) (q) 82,552
Gain on Sale of
Properties....... 0 74,640 0 74,640
Provision For
Loss on
Properties....... (215,797) 0 0 (215,797)
------------ ----------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/
(Provision) for
Federal Income
Taxes............ 10,888,205 700,531 22,658 11,611,394
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ----------- ------------------ ------------
Net
Earnings(Losses).. $10,888,205 $ 700,531 $ 22,658 $11,611,394
============ =========== ================== ============
</TABLE>
S-20
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
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
============ =========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 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
============ =========== ============ ========== ========== ============ ===========
Weighted average
units
outstanding
during period... n/a n/a n/a n/a n/a n/a n/a
============ =========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,401 n/a 37,347,401 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 n/a 37,348,464 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... 14,237,405 n/a n/a n/a n/a n/a n/a
============ =========== ============ ========== ========== ============ ===========
Cash
distributions
declared per
$10,000
Investment...... 191 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 $ -- $ -- $ -- $ 0
Mortgages/notes
receivable...... $ 41,269,740 0 $ 41,269,740 $ -- $ -- $247,896,287 $ 0
Receivables,
net............. $ 548,862 0 $ 548,862 $7,141,967 $5,457,493 $ 1,969,339 (148,629)(w)
Investment
in/due from
joint ventures.. $ 1,083,564 0 $ 1,083,564 $ -- $ -- $ -- 0
Total assets.... $708,694,145 $33,656,518(u) $742,350,663 $8,223,820 $6,308,406 $264,700,433 $31,927,513 (v1),(w)
Total
liabilities/minority
interest........ $ 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 $32,347,883 (v1),(x)
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund X, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- ------------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 542 49 n/a 591
============== =========== ==================== ==================
Earnings per
share/unit...... $ n/a 0.18 $ n/a $ 0.25
============== =========== ==================== ==================
Book value per
share/unit...... $ n/a $ 8.29 $ n/a $ 16.42
============== =========== ==================== ==================
Dividends per
share/unit...... $ n/a $ 0.23 $ n/a $ n/a
============== =========== ==================== ==================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 3.28x
============== =========== ==================== ==================
Weighted average
units
outstanding
during period... n/a 4,000,000 n/a n/a
============== =========== ==================== ==================
Weighted average
shares
outstanding
during period... 43,497,401 n/a 2,097,571 45,594,972 (r)
============== =========== ==================== ==================
Shares
outstanding..... 43,498,464 n/a 2,097,571 45,596,035
============== =========== ==================== ==================
Cash
distributions
declared:....... n/a 900,001 n/a $ 19,784,193 (s)
============== =========== ==================== ==================
Cash
distributions
declared per
$10,000
Investment...... n/a 225 n/a $ 217 (t)
============== =========== ==================== ==================
Balance sheet
data:
Real estate
assets, net..... $ 647,547,023 $27,455,333 $11,786,326 (v2) $ 686,788,682
Mortgages/notes
receivable...... $ 289,166,027 $ -- $ 0 $ 289,166,027
Receivables,
net............. $ 14,969,032 $ 35,646 $ (10,588)(y) $ 14,994,090
Investment
in/due from
joint ventures.. $ 1,083,564 $ 4,196,724 $ 1,660,495 (v2) $ 6,940,783
Total assets.... $1,053,510,835 $34,335,528 $ 8,787,409 (x2),(y) $1,096,633,772
Total
liabilities/minority
interest........ 346,929,801 $ 1,182,101 $ (10,588)(y) $ 348,101,314
Total equity.... $ 706,581,034 $33,153,427 $ 8,797,997 (v2) $ 748,532,458
</TABLE>
S-21
<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 Advisor,
the CNL Restaurant Financial Services Group and the Income Fund:
<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 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
</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>
(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)
<TABLE>
<S> <C>
Amortization of goodwill....................................... $535,335
</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 $66,794 in accrued rental income resulting from the straight-
lining of scheduled rent increases throughout the lease terms for the
leases acquired from the Income Fund as if the leases had been acquired on
January 1, 1998.
S-22
<PAGE>
(k) Represents the elimination of fees between the Advisor and the Income Fund:
<TABLE>
<S> <C>
Management fees............................................... $ 0
Reimbursement of administrative costs......................... (11,668)
--------
$(11,668)
========
</TABLE>
(l) Represents the elimination of $11,668 in administrative costs reimbursed by
the Income Fund to the Advisor.
(m) Represents savings of $17,995 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income Fund to
the Advisor.
(o) Represents additional state income taxes of $8,653 resulting from assuming
that acquisitions of properties that had been operational when APF acquired
them from January 1, 1999 through May 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 Fund 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 $39,234 as a result of
adjusting the historical basis of the real estate wholly owned by the Income
Fund to fair value as a result of accounting for the Acquisition of the
Income Fund under the purchase accounting method. The adjustment to the basis
of the buildings is being depreciated using the straight-line method over the
remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $14,244 as a
result of adjusting the historical basis of the real estate owned by the
Income Fund, indirectly through joint venture or tenancy in common
arrangements, to fair value as a result of accounting for the Acquisition
of the Income Fund under the purchase accounting method. The adjustment to
the basis of the buildings owned indirectly by the Income Fund is being
depreciated using the straight-line method over the remaining useful lives
of the properties.
(r) Common shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 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.
S-23
<PAGE>
(v) Represents the effect of recording the acquisitions of the Advisor, the CNL
Restaurant Financial Services Group and the Income Fund using the purchase
accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Shares Offered.......... 3,800,000 2,350,000 2,097,571.2 8,247,571.2
Exchange Value.......... $ 20 $ 20 $ 20 $ 20
----------- ----------- ----------- ------------
Share Consideration..... $76,000,000 $47,000,000 $41,951,424 $164,951,424
Cash Consideration...... -- -- 481,000 481,000
APF Transaction Costs... 4,916,980 3,040,764 2,745,256 10,703,000
----------- ----------- ----------- ------------
Total Purchase Price... $80,916,980 $50,040,764 $45,177,680 $176,135,424
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets --
Historical............ $ 7,141,252 $10,006,878 $33,153,427 $ 50,301,557
Purchase Price
Adjustments:
Land and buildings on
operating leases...... 9,390,389 9,390,389
Net investment in
direct financing
leases................ 2,395,937 2,395,937
Investment in joint
ventures.............. 1,660,495 1,660,495
Accrued rental income.. (1,367,237) (1,367,237)
Intangibles and other
assets................ (2,792,876) (55,331) (2,848,207)
Goodwill*.............. 42,826,762 -- 42,826,762
Excess purchase price.. 73,775,728 -- -- 73,775,728
----------- ----------- ----------- ------------
Total Allocation....... $80,916,980 $50,040,764 $45,177,680 $176,135,424
=========== =========== =========== ============
</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 pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,775,728 was
expensed at March 31, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations". Goodwill of 42,826,762 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..................................... 73,775,728
Goodwill for CFC (Intangibles and other
assets)...................................... 42,826,762
CFC/CFS Org Costs/Other Assets............... 2,792,876
Cash to pay APF transaction costs............ 7,957,744
APF Common Stock............................. 61,500
APF APIC..................................... 122,938,500
(To record acquisition of CFA, CFS and CFC)
2. Partners Capital............................ 33,153,427
Land and buildings on operating leases........ 9,390,389
Net investment in direct financing leases..... 2,395,937
Investment in joint ventures.................. 1,660,495
Accrued rental income........................ 1,367,237
Intangibles and other assets................. 55,331
Cash to pay APF Transaction costs............ 2,745,256
Cash consideration to Income Fund............ 481,000
APF Common Stock............................. 20,976
APF APIC..................................... 41,930,448
(To record acquisition of Income Fund)
</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 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.
(y) Represents the elimination by the Income Fund of $10,588 in related party
payables recorded as receivables by the Advisor.
S-24
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND X, LTD.
The following table sets forth certain financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund X,
Ltd." in this supplement.
<TABLE>
<CAPTION>
Quarter Ended
March 31, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 818,554 $ 893,530 $ 3,169,493 $ 3,813,248 $ 3,871,869 $ 3,875,779 $ 4,020,289
Net income (2).......... 700,531 950,751 1,878,858 3,531,381 3,461,812 3,552,067 3,672,841
Cash distributions
declared (3)............ 900,001 980,001 3,680,004 3,600,003 3,640,003 3,640,003 3,625,017
Net income per unit
(2).................... 0.17 0.24 0.46 0.87 0.86 0.88 0.91
Cash distributions
declared per
unit (3)............... 0.23 0.25 0.92 0.90 0.91 0.91 0.91
GAAP book value per
unit................... 8.29 8.78 8.34 8.79 8.81 8.85 8.87
Weighted average number
of Limited Partner
units outstanding...... 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
<CAPTION>
March 31, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $34,335,528 $36,363,935 $34,480,865 $36,289,727 $36,437,560 $36,563,796 $36,722,696
Total partners'
capital................ 33,153,427 35,124,793 33,352,897 35,154,043 35,222,665 35,400,856 35,488,792
</TABLE>
- --------
(1) Revenues include equity in earnings of unconsolidated joint ventures,
minority interest in income of the consolidated joint venture and
adjustments to accrued rental income as a result of certain tenants filing
for bankruptcy and rejecting the leases related to these restaurant
properties.
(2) Net income for the quarters ended March 31, 1999 and 1998, and for the
years ended December 31, 1998, 1997 and 1995, include $74,640, $171,159,
$218,960, $132,238 and $67,214, respectively, from gains on sale of land
and buildings. Net income for the year ended December 31, 1998 includes
$1,001,846 from provision for loss on land, building and net investment in
direct financing lease.
(3) Distributions for the quarter ended March 31, 1998, and the years ended
December 31, 1998, 1996 and 1995, each includes a special distribution to
the Limited Partners of $80,000, $80,000, $40,000 and $40,000,
respectively, which represented cumulative excess operating reserves.
S-25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND X, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on April
16, 1990, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurants, as well as land
upon which restaurants were to be constructed, which are leased primarily to
operators of selected national and regional fast-food and family-style
restaurant chains. The leases are triple-net leases, with the lessees generally
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of 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.
S-26
<PAGE>
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
S-27
<PAGE>
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.
S-28
<PAGE>
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
S-29
<PAGE>
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.
S-30
<PAGE>
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
S-31
<PAGE>
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
S-32
<PAGE>
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.
S-33
<PAGE>
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.
S-34
<PAGE>
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.
S-35
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998...... F-1
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998.................................................................... F-2
Condensed Statements of Partner's Capital for the Quarter Ended March 31,
1999 and for the Year Ended December 31, 1998........................... F-3
Condensed Statements of Cash Flows for the Quarter Ended March 31, 1999
and 1998................................................................ F-4
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998........................................................... F-5
Report of Independent Accountants........................................ F-8
Balance Sheets as of December 31, 1998 and 1997.......................... F-9
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-10
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-11
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-12
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-13
Unaudited Pro Forma Financial Information................................ F-23
Unaudited Pro Forma Balance Sheet as of March 31, 1999................... F-24
Unaudited Pro Forma Statement of Earnings for the Quarter Ended March 31,
1999.................................................................... F-26
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998.................................................................... F-28
Unaudited Pro Forma Statement of Cash Flows for the Quarter Ended March
31, 1999................................................................ F-30
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................ F-32
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements.............................................................. F-34
</TABLE>
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
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-1
<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-2
<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-3
<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-4
<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-5
<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-6
<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. 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-7
<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-8
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building..................................... $16,685,182 $15,709,899
Net investment in direct financing leases, less
allowance for impairment in carrying value............ 10,713,000 13,460,125
Investment in joint ventures........................... 3,421,329 3,505,326
Cash and cash equivalents.............................. 1,835,972 1,583,883
Restricted cash........................................ 361,403 92,236
Receivables, less allowance for doubtful accounts of
$236,810 and $137,856................................. 81,100 123,903
Prepaid expenses....................................... 5,229 5,877
Accrued rental income, less allowance for doubtful
accounts of $269,421 and $117,593..................... 1,342,166 1,775,374
Other assets........................................... 35,484 33,104
----------- -----------
$34,480,865 $36,289,727
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 2,403 $ 6,033
Accrued and escrowed real estate taxes payable......... 27,418 27,784
Distributions payable.................................. 900,001 900,001
Due to related parties................................. 29,987 4,946
Rents paid in advance and deposits..................... 103,414 132,419
----------- -----------
Total liabilities.................................... 1,063,223 1,071,183
Minority interest...................................... 64,745 64,501
Partners' capital...................................... 33,352,897 35,154,043
----------- -----------
$34,480,865 $36,289,727
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $ 1,886,761 $1,896,607 $1,921,562
Adjustments to accrued rental income.... (457,567) (28,812) (88,781)
Earned income from direct financing
leases................................. 1,281,596 1,534,525 1,648,358
Contingent rental income................ 67,511 51,678 45,126
Interest and other income............... 108,481 88,853 75,896
----------- ---------- ----------
2,886,782 3,542,851 3,602,161
----------- ---------- ----------
Expenses:
General operating and administrative.... 163,189 153,672 166,049
Bad debt expense........................ 5,887 -- --
Professional services................... 44,309 26,890 33,692
Real estate taxes....................... 199 9,703 --
State and other taxes................... 10,520 9,372 2,357
Depreciation and amortization........... 259,866 214,468 207,959
Transaction costs....................... 23,779 -- --
----------- ---------- ----------
507,749 414,105 410,057
----------- ---------- ----------
Income Before Minority Interest in Income
of Consolidated Joint Venture, Equity in
Earnings of Unconsolidated Joint
Ventures, Gain on Sale of Land and
Building and Provision for Loss on Land,
Building, and Impairment in Carrying
Value of Net Investment in Direct
Financing Lease.......................... 2,379,033 3,128,746 3,192,104
Minority Interest in Income of
Consolidated Joint Venture............... (9,302) (8,522) (8,663)
Equity in Earnings of Unconsolidated Joint
Ventures................................. 292,013 278,919 278,371
Gain on Sale of Land and Building......... 218,960 132,238 --
Provision for Loss on Land, Building, and
Impairment in Carrying Value of Net
Investment in Direct Financing Lease..... (1,001,846) -- --
----------- ---------- ----------
Net Income................................ $ 1,878,858 $3,531,381 $3,461,812
=========== ========== ==========
Allocation of Net Income:
General partners........................ $ 21,016 $ 33,991 $ 34,618
Limited partners........................ 1,857,842 3,497,390 3,427,194
----------- ---------- ----------
$ 1,878,858 $3,531,381 $3,461,812
=========== ========== ==========
Net Income Per Limited Partner Unit....... $ 0.46 $ 0.87 $ 0.86
=========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................ 4,000,000 4,000,000 4,000,000
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $139,100 $40,000,000 $(13,723,133) $13,773,889 $(4,790,000) $35,400,856
Distributions to
limited partners
($0.91 per limited
partner unit)......... -- -- -- (3,640,003) -- -- (3,640,003)
Net income............. -- 34,618 -- -- 3,427,194 -- 3,461,812
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 173,718 40,000,000 (17,363,136) 17,201,083 (4,790,000) 35,222,665
Distributions to
limited partners
($0.90 per limited
partner unit)......... -- -- -- (3,600,003) -- -- (3,600,003)
Net income............. -- 33,991 -- -- 3,497,390 -- 3,531,381
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 207,709 40,000,000 (20,963,139) 20,698,473 (4,790,000) 35,154,043
Distributions to
limited partners
($0.92 per limited
partner unit)......... -- -- -- (3,680,004) -- -- (3,680,004)
Net income............. -- 21,016 -- -- 1,857,842 -- 1,878,858
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $228,725 $40,000,000 $(24,643,143) $22,556,315 $(4,790,000) $33,352,897
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants................ $3,382,562 $3,380,391 $3,491,064
Distributions from unconsolidated joint
ventures................................. 373,004 353,207 354,648
Cash paid for expenses.................... (221,284) (190,902) (211,345)
Interest received......................... 70,156 53,721 61,435
---------- ---------- ----------
Net cash provided by operating
activities.............................. 3,604,438 3,596,417 3,695,802
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building... 1,591,794 1,363,805 --
Additions to land and buildings on
operating leases......................... (1,020,329) (1,277,308) (978)
Investment in direct financing leases..... -- -- (1,542)
Investment in joint venture............... -- (130,404) (108,952)
Increase in restricted cash............... (237,758) (89,702) --
Other..................................... 3,006 -- --
---------- ---------- ----------
Net cash provided by (used in) investing
activities.............................. 336,713 (133,609) (111,472)
---------- ---------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners......... (3,680,004) (3,640,002) (3,640,003)
Distributions to holder of minority
interest................................. (9,058) (8,406) (7,697)
---------- ---------- ----------
Net cash used in financing activities.... (3,689,062) (3,648,408) (3,647,700)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... 252,089 (185,600) (63,370)
Cash and Cash Equivalents at Beginning of
Year...................................... 1,583,883 1,769,483 1,832,853
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $1,835,972 $1,583,883 $1,769,483
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income................................ $1,878,858 $3,531,381 $3,461,812
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Bad debt expense.......................... 5,887 -- --
Depreciation.............................. 259,866 214,468 206,497
Amortization.............................. -- -- 1,462
Minority interest in income of
consolidated joint venture............... 9,302 8,522 8,663
Equity in earnings of unconsolidated joint
ventures, net of distributions........... 80,991 74,288 75,898
Gain on sale of land and building......... (218,960) (132,238) --
Provision for loss on land, building, and
impairment in carrying value of net
investment in direct financing lease..... 1,001,846 -- --
Decrease (increase) in receivables........ 8,312 (71,222) 46,834
Decrease (increase) in prepaid expenses... 648 (374) (3,852)
Decrease in net investment in direct
financing leases......................... 219,237 211,942 160,007
Decrease (increase) in accrued rental
income................................... 300,791 (201,022) (315,029)
Increase in other assets.................. (2,380) -- --
Increase (decrease) in accounts payable
and accrued expenses..................... (3,996) (14,156) 14,318
Increase (decrease) in due to related
parties.................................. 25,041 3,337 (5,395)
Increase (decrease) in rents paid in
advance and deposits..................... 38,995 (28,509) 44,587
---------- ---------- ----------
Total adjustments........................ 1,725,580 65,036 233,990
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $3,604,438 $3,596,417 $3,695,802
========== ========== ==========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at
December 31.............................. $ 900,001 $ 900,001 $ 940,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund X, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
estimate of net cash flows expected to be generated from its properties and the
need for asset impairment write-downs. If an impairment is indicated, the
assets are adjusted to their fair value.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership
F-13
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
continued to pursue collection of such amounts. If amounts are subsequently
determined to be uncollectible, the corresponding receivable and allowance for
doubtful accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership accounts for its 88.26%
interest in Allegan Real Estate Joint Venture using the consolidation method.
Minority interest represents the minority joint venture partner's proportionate
share of the equity in the Partnership's consolidated joint venture. All
significant intercompany accounts and transactions have been eliminated.
The Partnership's investments in CNL Restaurant Investments III, Williston
Real Estate Joint Venture and Ashland Joint Venture, and the property in
Clinton, North Carolina, and the property in Miami, Florida, for which each
property is held as tenants-in-common with affiliates, are accounted for using
the equity method since the Partnership shares control with affiliates which
have the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
2. Leases:
The Partnership leases its land and buildings to operators of national and
regional fast-food and family-style restaurants. The leases are accounted for
under the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." Some of the leases have been classified as operating
leases and some of the leases have been classified as direct financing leases.
For the leases classified as direct financing
F-14
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
leases, the building portions of the property leases are accounted for as
direct financing leases while the land portions of the majority of these leases
are operating leases. Substantially all leases are for 15 to 20 years and
provide for minimum and contingent rentals. In addition, the tenant pays all
property taxes and assessments, fully maintains the interior and exterior of
the building and carries insurance coverage for public liability, property
damage, fire and extended coverage. The lease options generally allow tenants
to renew the leases for two to five successive five-year periods subject to the
same terms and conditions as the initial lease. Most leases also allow the
tenant to purchase the property at fair market value after a specified portion
of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................... $ 9,741,686 $ 9,947,295
Buildings.......................................... 8,588,903 6,875,851
Construction in process............................ 592,943 --
----------- -----------
18,923,532 16,823,146
Less accumulated depreciation...................... (1,329,832) (1,113,247)
----------- -----------
17,593,700 15,709,899
Less allowance for loss on land and building....... (908,518) --
----------- -----------
$16,685,182 $15,709,899
=========== ===========
</TABLE>
During 1997, the Partnership sold its property in Fremont, California, to
the franchisor, for $1,420,000 and received net sales proceeds of $1,363,805,
resulting in a gain of $132,238 for financial reporting purposes. This property
was originally acquired by the Partnership in March 1992 and had a cost of
approximately $1,116,900, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $249,700 in excess of its original purchase price. In October
1997, the Partnership reinvested approximately $1,277,300 in a Boston Market
property located in Homewood, Alabama.
In March 1998, a vacant parcel of land relating to the property in Austin,
Texas, was sold to a third party who had previously subleased the land from the
Partnership's lessee. In connection therewith, the Partnership received net
sales proceeds of $68,434 ($68,000 of which had been received and recorded as a
deposit in 1995), resulting in a gain of $7,810 for financial reporting
purposes.
During 1998, the Partnership sold two properties for a total of $1,612,000
and received net sales proceeds totalling $1,591,360, resulting in a total gain
of $211,150 for financial reporting purposes. These properties were originally
acquired by the Partnership in 1991 and 1992 and had total costs of
approximately $1,271,400, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the properties for
approximately $320,000 in excess of their original purchase prices. In November
1998, the Partnership reinvested the majority of the net sales proceeds from
the sale of its property in Sacramento, California in a Jack in the Box
property in San Marcos, Texas.
During the year ended December 31, 1998, the Partnership recorded a
provision for loss on land and building totalling $908,518 for financial
reporting purposes relating to the Properties in Lancaster, New York, Amherst,
New York and Homewood, Alabama, respectively. The tenants of these Properties
filed for
F-15
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
bankruptcy during 1998, and rejected the leases related to two of these
Properties. The allowance represents the difference between the carrying value
of the Properties at December 31, 1998 and the estimated net realizable value
for these Properties.
Some leases provide for escalating guaranteed minimum rents throughout the
lease term. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the year ended December
31, 1998, the Partnership recognized a loss of $300,791 (net of $151,828 in
reserves and $305,739 in write-offs) and for the years ended December 31, 1997
and 1996, the Partnership recognized income of $201,022 and $315,029,
respectively, (net of reserves of $28,812 and $88,781, respectively).
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,725,916
2000............................................................. 1,737,475
2001............................................................. 1,781,312
2002............................................................. 1,896,469
2003............................................................. 1,908,568
Thereafter....................................................... 13,254,521
-----------
$22,304,261
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales. These amounts do not include minimum lease payments
that will become due when the property under development is completed.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Minimum lease payments receivable.............. $ 18,740,085 $ 25,273,063
Estimated residual values...................... 3,553,036 4,225,008
Less unearned income........................... (11,486,793) (16,037,946)
------------ ------------
10,806,328 13,460,125
Less allowance for impairment in carrying
value......................................... (93,328) --
------------ ------------
Net investment in direct financing leases...... $ 10,713,000 $ 13,460,125
============ ============
</TABLE>
During 1997, the Partnership sold its property in Fremont, California, for
which the building portion had been classified as a direct financing lease. In
connection therewith, the gross investment (minimum lease payment receivable
and estimated residual value) and unearned income relating to this property
were removed from the accounts and the gain from the sale relating to the land
portion of the property was reflected in income (Note 3).
F-16
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
During 1998, the Partnership sold a property, for which the building portion
had been classified as a direct financing lease. In connection therewith, the
gross investment (minimum lease payments receivable and the estimated residual
value) and unearned income relating to the building were removed from the
accounts and the gain from the sale of the property was reflected in income
(see Note 3).
During 1998, three of the Partnership's leases were amended and one of the
Partnership's leases that was classified as a direct financing lease was
rejected in connection with the tenant filing for bankruptcy. As a result, the
Partnership reclassified the two of the three amended leases and the rejected
lease from direct financing leases to operating leases. In accordance with the
Statement of Financial Accounting Standards #13, "Accounting for Leases," the
Partnership recorded the reclassified leases at the lower of original costs,
present fair value, or present carrying amount. No losses on the termination of
direct financing leases were recorded for financial reporting purposes.
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,389,897
2000............................................................. 1,391,381
2001............................................................. 1,398,824
2002............................................................. 1,429,020
2003............................................................. 1,440,530
Thereafter....................................................... 11,690,433
-----------
$18,740,085
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
5. Investment in Joint Ventures:
The Partnership has a 50 percent, a 10.51%, a 40.95%, and a 13% interest in
the profits and losses of CNL Restaurant Investments III, Ashland Joint
Venture, Williston Real Estate Joint Venture and a property in Clinton, North
Carolina, held as tenants-in-common with affiliates of the general partners.
The remaining interests in these joint ventures are held by affiliates of the
Partnership which have the same general partners.
In December 1997, the Partnership acquired and leased a property in Miami,
Florida, as tenants-in-common with affiliates of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with affiliates, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 6.69% interest in this property.
CNL Restaurant Investments III owns and leases six properties to an operator
of national fast-food restaurants. Ashland Joint Venture, Williston Real Estate
Joint Venture and the Partnership and affiliates as tenants-in-common in two
separate tenancy-in-common arrangements, each own and lease one property to an
F-17
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
operator of national fast-food or family-style restaurants. The following
presents the joint ventures' combined, condensed financial information at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $ 9,340,944 $ 9,573,341
Net investment in direct financing lease.......... 657,426 661,991
Cash.............................................. 2,935 8,197
Receivables....................................... 7,597 26,766
Prepaid expenses.................................. 24,337 22,852
Accrued rental income............................. 19,880 --
Liabilities....................................... 3,119 7,415
Partners' capital................................. 10,050,000 10,285,732
Revenues.......................................... 1,115,856 930,470
Net income........................................ 843,914 695,878
</TABLE>
The Partnership recognized income totalling $292,013, $278,919, and $278,371
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
6. Restricted Cash:
As of December 31, 1997, net sales proceeds of $89,702 from the sale of the
property in Fremont, California, plus accrued interest of $2,534, were being
held in an interest-bearing escrow account pending the release of funds by the
escrow agent to acquire an additional property. The funds were released by the
escrow agent in 1998 and were used to acquire an additional property. (See Note
3).
As of December 31, 1998, the net sales proceeds of $359,990 from the sale of
a property, plus accrued interest of $1,413 were being held in an interest-
bearing escrow account pending the release of funds by the escrow agent to
acquire an additional property.
7. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their 10%
Preferred Return, plus the return of their adjusted capital contributions. The
general partners will then receive, to the extent previously subordinated and
unpaid, a one percent interest in all prior distributions of net cash flow and
a return of their capital contributions. Any remaining sales proceeds will be
distributed 95 percent to the limited partners and five percent to the general
partners. Any gain from the sale of a property not in liquidation of the
Partnership is, in general, allocated in the same manner as net sales proceeds
are distributable. Any loss from the sale of a property is, in general,
allocated first, on a pro rata basis, to partners with positive balances in
their capital accounts; and thereafter, 95 percent to the limited partners and
five percent to the general partners.
F-18
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital account balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
declared distributions to the limited partners of $3,680,004, $3,600,003, and
$3,640,003, respectively. No distributions have been made to the general
partners to date.
8. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.............................. $1,878,858 $3,531,381 $3,461,812
Depreciation for tax reporting purposes
in excess of depreciation for
financial reporting purposes.......... (228,986) (289,098) (298,518)
Direct financing leases recorded as
operating leases for tax reporting
purposes.............................. 219,237 211,942 160,007
Equity in earnings of unconsolidated
joint ventures for tax reporting
purposes in excess of equity in
earnings of unconsolidated joint
ventures for financial
reporting purposes.................... 12,612 15,294 10,839
Gain on sale of land and building for
financial reporting purposes less than
(in excess of) gain for tax
reporting purposes.................... 65,474 (42,996) --
Allowance for loss on land and
building.............................. 1,001,846 -- --
Allowance for doubtful accounts........ 98,954 133,428 --
Accrued rental income.................. 300,791 (201,022) (315,029)
Rents paid in advance.................. 38,995 (22,593) 45,447
Minority interest in timing differences
of consolidated joint venture......... 413 1,461 2,184
Capitalization of transaction costs for
tax reporting purposes................ 23,779 -- --
Other.................................. -- -- (7,738)
---------- ---------- ----------
Net income for federal income tax
purposes.............................. $3,411,973 $3,337,797 $3,059,004
========== ========== ==========
</TABLE>
F-19
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
9. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors,
Inc. (hereinafter referred to as the "Affiliate") performed certain services
for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate an annual, noncumulative, subordinated management fee of
one percent of the sum of gross revenues from properties wholly owned by the
Partnership and the Partnership's allocable share of gross revenues from joint
ventures, but not in excess of competitive fees for comparable services. These
fees will be incurred and will be payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners do not receive their 10% Preferred
Return in any particular year, no management fees will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1998, 1997, and 1996.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the net sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. In addition, the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate 10% Preferred Return,
plus their adjusted capital contributions. No deferred, subordinated real
estate disposition fees have been incurred since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $105,445, $87,967, and $94,496 for the
years ended December 31, 1998, 1997, and 1996, respectively, for such services.
During 1997, the Partnership acquired a property for a purchase price of
$1,277,300 from CNL BB Corp., an affiliate of the general partners. CNL BB
Corp. had purchased and temporarily held title to this property in order to
facilitate the acquisition of the property by the Partnership. The purchase
price paid by the Partnership represented the costs incurred by CNL BB Corp. to
acquire and carry the property, including closing costs.
The due to related parties at December 31, 1998 and 1997, totalled $29,987
and $4,946, respectively.
F-20
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
10. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, or affiliated groups of lessees, each representing more
than ten percent of the Partnership's total rental and earned income (including
the Partnership's share of total rental and earned income from unconsolidated
joint ventures and the properties held as tenants-in-common with affiliates),
for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation........................ $578,430 $548,399 $568,164
Foodmaker, Inc................................... 436,577 646,477 684,277
Flagstar Enterprises, Inc. (and Denny's Inc.
during the years ended December 31, 1997 and
1996)........................................... N/A 602,913 668,919
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from unconsolidated joint ventures and
the properties held as tenants-in-common with affiliates) for each of the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Burger King...................................... $758,178 $777,378 $714,792
Golden Corral Family Steakhouse Restaurants...... 578,430 548,399 568,164
Shoney's......................................... 440,333 441,052 439,330
Jack in the Box.................................. 436,577 646,477 684,277
Hardees.......................................... 400,716 403,882 468,037
Perkins.......................................... N/A N/A 393,046
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
11. Subsequent Events:
In January 1999, the Partnership used the net proceeds from the sales of
properties during 1998 and 1997 to enter into a joint venture arrangement,
Ocean Shores Joint Venture, with an affiliate of the general partners, to hold
one restaurant property. The Partnership contributed approximately $802,400 to
acquire the restaurant property. The Partnership owns a 69.06% interest in the
profits and losses of the joint venture. The Partnership will account for its
investment in this joint venture under the equity method since the Partnership
will share control with an affiliate.
F-21
<PAGE>
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 4,243,243 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF'smost recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $41,779,262 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
12. Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 11 being adjusted to 2,121,622 shares valued at $20.00 per
APF share.
F-22
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of the Advisor
and the CNL Restaurant Financial Services Group, and the acquisition of the
Income Fund (the acquisition of the Income Fund is referred to as the
"Acquisition"), and is based on estimates and assumptions set forth below in
the notes to such information which included pro forma adjustments. This
unaudited pro forma financial information has been prepared utilizing the
historical financial statements of APF, the historical combined financial
information of the Income Fund, the Advisor and CNL Restaurant Financial
Services Group (shown separately as CFS and CFC) and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, Income Fund, Advisor and CNL Restaurant Financial Services Group. The
pro forma balance sheet assumes that the Acquisition occurred on 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.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of March 31, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL
Historical Pro Forma Historical Financial
APF Adjustments Subtotal Advisor Services, Inc.
------------ ------------ ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Buildingon
operating leases (net
depreciation).......... 475,787,661 58,749,637 (A) 534,537,298 0 0
Net Investment in Direct
Financing Leases....... 123,270,117 0 123,270,117 0 0
Mortgages and Notes
Receivable............. 41,269,740 0 41,269,740 0 0
Other Investments....... 16,199,792 0 16,199,792 0 0
Investment In Joint
Ventures............... 1,083,564 0 1,083,564 0 0
Cash and Cash
Equivalents............ 35,796,119 (25,093,119)(A) 10,703,000 591,712 552,415
Restricted
Cash/Certificates of
Deposit................ 2,007,278 0 2,007,278 0 0
Receivables (net
allowances)/Due from
Related Party.......... 548,862 0 548,862 7,141,967 5,457,493
Accrued Rental Income... 5,007,334 0 5,007,334 0 0
Other Assets............ 7,723,678 0 7,723,678 490,141 298,498
Goodwill................ 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Assets........... $708,694,145 $33,656,518 $742,350,663 $8,223,820 $6,308,406
============ =========== ============ ========== ==========
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 3,464,190 $ 0 $ 3,464,190 $ 576,531 $ 304,375
Accrued Construction
Costs Payable.......... 10,172,169 0 10,172,169 0 0
Distributions Payable... 0 0 0 119,808 0
Due to Related Parties.. 148,629 0 148,629 0 563,724
Income Tax Payable...... 0 0 0 0 0
Line of Credit/Notes
payable................ 34,150,000 33,656,518 (A) 67,806,518 386,229 0
Deferred Income......... 2,052,530 0 2,052,530 0 0
Rents Paid in Advance... 1,340,636 0 1,340,636 0 0
Minority Interest....... 280,970 0 280,970 0 0
Common Stock............ 373,483 0 373,483 0 0
Common Stock--Class A... 0 0 0 6,400 2,000
Common Stock--Class B... 0 0 0 3,600 724
Additional Paid-in-
capital................ 670,005,177 0 670,005,177 4,617,047 5,303,503
Accumulated
distributions in excess
of net earnings........ (13,293,639) 0 (13,293,639) 2,514,205 134,080
Partners Capital........ 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Liabilities and
Equity................ $708,694,145 $33,656,518 $742,350,663 $8,223,820 $6,308,406
============ =========== ============ ========== ==========
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of March 31, 1999
<TABLE>
<CAPTION>
Historical
CNL Combining Historical CNL
Financial Pro Forma Income Funds Pro Forma Adjusted
Corp. Adjustments Combined APF X, Ltd. Adjustments Pro Forma
------------ ------------ -------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... 0 0 534,537,298 17,362,457 9,390,389 (B2) 561,290,144
Net Investment in Direct
Financing Leases....... 0 0 123,270,117 10,092,876 2,395,937 (B2) 135,758,930
Mortgages and Notes
Receivable............. 247,896,287 0 289,166,027 -- 0 289,166,027
Other Investments....... 6,353,482 0 22,553,274 0 0 22,553,274
Investment In Joint
Ventures............... 0 0 1,083,564 4,196,724 1,660,495 (B2) 6,940,783
Cash and Cash
Equivalents............ 4,896,688 (7,957,744)(B1) 8,786,071 1,225,257 (2,745,256)(B2) 6,785,072
(481,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 853,243 0 2,860,521 -- 0 2,860,521
Receivables (net
allowances) Due from
Related Party.......... 1,969,339 (148,629)(C) 14,969,032 35,646 (10,588)(E) 14,994,090
Accrued Rental Income... 0 0 5,007,334 1,367,237 (1,367,237)(B2) 5,007,334
Other Assets............ 2,731,394 (2,792,876)(B1) 8,450,835 55,331 (55,331)(B2) 8,450,835
Goodwill................ 0 42,826,762 (B1) 42,826,762 0 0 42,826,762
------------ ------------ -------------- ----------- ------------ --------------
Total Assets........... $264,700,433 $ 31,927,513 $1,053,510,835 $34,335,528 $ 8,787,409 $1,096,633,772
============ ============ ============== =========== ============ ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 1,613,959 $ 0 $ 5,959,055 $ 80,160 $ 0 $ 6,039,215
Accrued Construction
Costs Payable.......... 0 0 10,172,169 0 0 10,172,169
Distributions Payable... 0 0 119,808 900,001 0 1,019,809
Due to Related Parties.. 31,310,681 (148,629)(C) 31,874,405 10,588 (10,588)(E) 31,874,405
Income Tax Payable...... 271,741 (271,741)(D) 0 0 0 0
Line of Credit/Notes
payable................ 226,937,481 0 295,130,228 0 0 295,130,228
Deferred Income......... 0 0 2,052,530 0 0 2,052,530
Rents Paid in Advance... 0 0 1,340,636 126,906 0 1,467,542
Minority Interest....... 0 0 280,970 64,446 0 345,416
Common Stock............ 0 61,500 (B1) 434,983 0 20,976 (B2) 455,959
Common Stock--Class A... 200 (8,600)(B1) 0 0 0 0
Common Stock--Class B... 501 (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 3,937,095 122,938,500 (B1) 792,943,677 0 41,930,448 (B2) 834,500,639
(13,857,645)(B1)
Accumulated
distributions in excess
of net earnings........ 628,775 (3,277,060)(B1) (86,797,626) 0 0 (86,797,626)
(73,775,728)(B1)
271,741 (D)
Partners Capital........ 0 0 0 33,153,427 (33,153,427)(B2) 0
------------ ------------ -------------- ----------- ------------ --------------
Total Liabilities and
Equity $264,700,433 $ 31,927,513 $1,053,510,835 $34,335,528 $ 8,787,409 $1,096,633,772
============ ============ ============== =========== ============ ==============
</TABLE>
F-25
<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
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $12,184,008 $2,339,153(a) $14,523,161 $ 0 $ 0 $ 0
Fees................... 0 0 0 2,307,364 1,391,466 8,137
Interest and Other
Income................ 2,214,763 0 2,214,763 47,213 129,362 5,233,919
----------- ---------- ----------- ---------- ---------- ----------
Total Revenue.......... $14,398,771 $2,339,153 $16,737,924 $2,354,577 $1,520,828 $5,242,056
Expenses:
General and
Administrative
Expenses.............. 1,095,269 0 1,095,269 2,563,714 1,323,577 64,186
Management and Advisory
Fees.................. 697,364 0 697,364 0 0 611,196
Fees Paid to Related
Parties............... 0 0 0 23,326 292,575 0
Interest Expense....... 0 0 0 50,730 0 4,769,268
State Taxes............ 235,208 0 235,208 0 0 0
Depreciation--Other.... 0 0 0 39,581 26,238 0
Depreciation--
Property.............. 1,548,813 349,465(a) 1,898,278 0 0 0
Amortization........... 7,368 0 7,368 0 0 0
Transaction Costs...... 125,926 0 125,926 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
Total Expenses......... 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, 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)
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 17,271 0 17,271 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Provision For Loss on
Properties............ (215,797) 0 (215,797) 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
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)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 127,496 48,017 73,166
----------- ---------- ----------- ---------- ---------- ----------
Net Earnings (Losses)... $10,490,297 $1,989,688 $12,479,985 $ (195,278) $ (73,545) $ (129,428)
=========== ========== =========== ========== ========== ==========
Earnings Per
Share/Unit............. $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ==========
Book Value Per
Share/Unit............. $ 17.59 $ 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
=========== ========== =========== ========== ========== ==========
Ratio of Earnings to
Fixed Charges.......... 50.03x n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========== ==========
Wtd. Avg. Units
Outstanding............ 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
=========== ========== =========== ========== ========== ==========
Shares Outstanding...... 37,348,464 n/a 37,348,464 n/a n/a n/a
=========== ========== =========== ========== ========== ==========
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 Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Combining
Pro Forma Combined Historical CNL Pro Forma Adjusted
Adjustments APF Income Fund X, Ltd. Adjustments Pro Forma
----------- ----------- ------------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $14,523,161 $ 725,315 66,794 (j) $ 15,315,270
Fees................... (2,450,663)(b),(c) 1,256,304 0 (11,668)(k) 1,244,636
Interest and Other
Income................ 62,068 (d) 7,687,325 13,714 0 7,701,039
----------- ----------- --------- --------- ------------
Total Revenue.......... $(2,388,595) $23,466,790 $ 739,029 $ 55,126 $ 24,260,945
Expenses:
General and
Administrative
Expenses.............. (377,734)(e) 4,669,012 72,131 (29,663)(l),(m) 4,711,480
Management and Advisory
Fees.................. (1,308,560)(f) 0 0 0 (n) 0
Fees Paid to Related
Parties............... (292,786)(g) 23,115 0 0 23,115
Interest Expense....... 0 4,819,998 0 0 4,819,998
State Taxes............ 0 235,208 14,577 8,653 (o) 258,438
Depreciation--Other.... 0 65,819 0 0 65,819
Depreciation--
Property.............. 0 1,898,278 72,294 39,234 (p) 2,009,806
Amortization........... 535,335 (h) 542,703 0 0 542,703
Transaction Costs...... 0 125,926 33,661 0 159,587
----------- ----------- --------- --------- ------------
Total Expenses......... (1,443,745) 12,380,059 192,663 18,224 12,590,946
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties, and
Provision for Losses on
Properties............. $ (944,850) $11,086,731 $ 546,366 $ 36,902 $ 11,669,999
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 0 17,271 79,525 (14,244)(q) 82,552
Gain on Sale of
Properties............ 0 0 74,640 0 74,640
Provision For Loss on
Properties............ 0 (215,797) 0 0 (215,797)
----------- ----------- --------- --------- ------------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (944,850) 10,888,205 700,531 22,658 11,611,394
Benefit/(Provision) for
Federal Income Taxes.. (248,679)(i) 0 0 0 0
----------- ----------- --------- --------- ------------
Net Earnings (Losses)... $(1,193,529) $10,888,205 $ 700,531 $ 22,658 $ 11,611,394
=========== =========== ========= ========= ============
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.18 $ n/a $ 0.25
=========== =========== ========= ========= ============
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.29 $ n/a $ 16.42
=========== =========== ========= ========= ============
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.23 $ n/a $ n/a
=========== =========== ========= ========= ============
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.28x
=========== =========== ========= ========= ============
Wtd. Avg. Units
Outstanding............ n/a n/a 4,000,000 n/a n/a
=========== =========== ========= ========= ============
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,401 n/a 2,097,571 45,594,972 (r)
=========== =========== ========= ========= ============
Shares Outstanding...... 6,150,000 43,498,464 n/a 2,097,571 45,596,035
=========== =========== ========= ========= ============
Calculation of Pro Forma
Distributions:
Pro Forma Cash from
Operations from
Statement of Cash
Flows................. $(22,787,702)
Addback Pro Forma
Investments in Notes
Receivable............ 42,571,895
------------
Adjusted Pro Forma
Distributions Declared: $ 19,784,193 (s)
============
Pro Forma Wtd. Avg.
Dollars Outstanding.... $911,899,445 (t)
============
Pro Forma Cash
Distributions Declared
per $10,000
Investment............. $ 217 (u)
============
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 21,919,865(a) $55,049,526 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $21,919,865 $64,106,902 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 2,889,368(a) 6,931,658 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 2,889,368 12,298,325 11,435,228 7,966,916 25,677,829
Operating
Earnings(Losses) Before
Equity in Earnings of
Joint Ventures/Minority
Interests, Gain on Sale
of Properties, and
Provision for Losses on
Properties............. $32,778,080 $19,030,497 $51,808,577 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Other Expenses......... 0 0 0 0 0 0
Provision For Loss on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
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
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $19,030,497 $51,182,905 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Units
Outstanding............ n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,571,271 34,219,490 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 34,757 37,372,684 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Calculation of Pro Forma
Distributions Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows.............
Addback Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable......
Addback Pro Forma
Investments in Notes
Receivable............
Adjusted Pro Forma
Distributions Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL Income
Pro Forma Combined Fund X, Pro Forma
Adjustments APF Ltd. Adjustments
------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental and Earned Income..................... $ 0 $55,049,526 $2,778,301 $ 267,176 (j)
Fees......................................... (32,715,768)(b),(c) 3,226,263 0 (34,727)(k)
Interest and Other Income.................... 207,144 (d) 32,221,925 108,481 0
------------ ----------- ---------- ---------
Total Revenue................................ $(32,508,624) $90,497,714 $2,886,782 $ 232,449
Expenses:
General and Administrative................... (4,241,719)(e) 15,939,556 213,584 (84,885)(l),(m)
Management and Advisory Fees................. (4,658,434)(f) 0 0 0 (n)
Fees to Related Parties...................... (2,161,897)(g) 858,787 0 0
Interest Expense............................. 0 21,498,589 0 0
State Taxes.................................. 0 567,446 10,520 13,045 (o)
Depreciation--Other.......................... 0 199,157 0 0
Depreciation--Property....................... (340,898)(r) 6,590,760 259,866 156,936 (p)
Amortization................................. 2,141,338 (h) 2,305,339 0 0
Transaction Costs............................ 0 157,054 23,779 0
------------ ----------- ---------- ---------
Total Expenses............................... (9,261,610) 48,116,688 507,749 85,096
Operating Earnings(Losses) Before Equity in
Earnings of Joint Ventures/Minority
Interests, Gain on Sale of Properties, and
Provision for Losses on Properties........... $(23,247,014) $42,381,026 $2,379,033 $ 147,353
Equity in Earnings of Joint Venture/Minority
Interest.................................... 0 (14,138) 282,711 (56,976)(q)
Gain on Sale of Properties................... 0 0 218,960 0
Gain on Securitization....................... 0 3,694,351 0 0
Other Expenses............................... 0 0 0 0
Provision For Loss on Properties............. 0 (611,534) (1,001,846) 0
------------ ----------- ---------- ---------
Net Earnings (Losses) Before
Benefit/(Provision) for Federal Income
Taxes........................................ (23,247,014) 45,449,705 1,878,858 90,377
Benefit/(Provision) for Federal Income
Taxes....................................... 6,898,434 (i) 0 0 0
------------ ----------- ---------- ---------
Net Earnings (Losses)......................... $(16,348,580) $45,449,705 $1,878,858 $ 90,377
============ =========== ========== =========
Earnings Per Share/Unit....................... $ n/a $ n/a $ 0.47 $ n/a
============ =========== ========== =========
Book Value Per Share/Unit..................... $ n/a $ n/a $ 8.34 $ n/a
============ =========== ========== =========
Dividends Per Share/Unit...................... $ n/a $ n/a $ 0.90 $ n/a
============ =========== ========== =========
Ratio of Earnings to Fixed Charges............ n/a n/a n/a n/a
============ =========== ========== =========
Wtd. Avg. Units Outstanding................... n/a n/a 4,000,000 n/a
============ =========== ========== =========
Wtd. Avg. Shares Outstanding.................. 6,150,000 40,369,490 n/a 2,097,571
============ =========== ========== =========
Shares Outstanding............................ 6,150,000 43,522,684 n/a 2,097,571
============ =========== ========== =========
Calculation of Pro Forma Distributions Declared:
Pro Forma Cash from Operations from Statement
of Cashflows................................
Addback Pro Forma Net Cash Proceeds from
Securitization of Notes Receivable..........
Addback Pro Forma Investments in Notes
Receivable..................................
Adjusted Pro Forma Distributions Declared:
Pro Forma Wtd. Avg. Dollars Outstanding.......
Pro Forma Cash Distributions Declared per
$10,000 Investment...........................
<CAPTION>
Adjusted
Pro Forma
----------------
<S> <C>
Revenues:
Rental and Earned Income..................... $ 58,095,003
Fees......................................... 3,191,536
Interest and Other Income.................... 32,330,406
----------------
Total Revenue................................ $ 93,616,945
Expenses:
General and Administrative................... 16,068,255
Management and Advisory Fees................. 0
Fees to Related Parties...................... 858,787
Interest Expense............................. 21,498,589
State Taxes.................................. 591,011
Depreciation--Other.......................... 199,157
Depreciation--Property....................... 7,007,562
Amortization................................. 2,305,339
Transaction Costs............................ 180,833
----------------
Total Expenses............................... 48,709,533
Operating Earnings(Losses) Before Equity in
Earnings of Joint Ventures/Minority
Interests, Gain on Sale of Properties, and
Provision for Losses on Properties........... $ 44,907,412
Equity in Earnings of Joint Venture/Minority
Interest.................................... 211,597
Gain on Sale of Properties................... 218,960
Gain on Securitization....................... 3,694,351
Other Expenses............................... 0
Provision For Loss on Properties............. (1,613,380)
----------------
Net Earnings (Losses) Before
Benefit/(Provision) for Federal Income
Taxes........................................ 47,418,940
Benefit/(Provision) for Federal Income
Taxes....................................... 0
----------------
Net Earnings (Losses)......................... $ 47,418,940
================
Earnings Per Share/Unit....................... $ 1.12
================
Book Value Per Share/Unit..................... $ 16.46
================
Dividends Per Share/Unit...................... $ n/a
================
Ratio of Earnings to Fixed Charges............ 3.15x
================
Wtd. Avg. Units Outstanding................... n/a
================
Wtd. Avg. Shares Outstanding.................. 42,467,061 (s)
================
Shares Outstanding............................ $ 45,620,255
================
Calculation of Pro Forma Distributions Declared:
Pro Forma Cash from Operations from Statement
of Cashflows................................ $ 59,331,097
Addback Pro Forma Net Cash Proceeds from
Securitization of Notes Receivable.......... (265,871,668)
Addback Pro Forma Investments in Notes
Receivable.................................. 288,590,674
----------------
Adjusted Pro Forma Distributions Declared: $ 82,050,103 (t)
================
Pro Forma Wtd. Avg. Dollars Outstanding....... $849,341,219 (u)
================
Pro Forma Cash Distributions Declared per
$10,000 Investment........................... $ 966 (v)
================
</TABLE>
F-29
<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 Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 10,490,297 $ 1,989,688 (a) $ 12,479,985 $ (195,278) $ (73,545) $ (129,428)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 1,548,813 349,465 (b) 1,898,278 39,581 0 0
Amortization expense... 7,368 0 7,368 0 26,238 424,697
Minority interest in
income of consolidated
joint venture......... 7,763 0 7,763 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 23,234 0 23,234 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 215,797 0 215,797 0 0 (73,166)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (82,660) 0 (82,660) (377,933) (242,251) (6,771)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (449,580)
Investment in notes
receivable............ 0 0 0 0 0 (42,571,895)
Collections on notes
receivable............ 0 0 0 0 0 6,417,907
Increase in restricted
cash.................. 0 0 0 0 0 (402,461)
Decrease in due from
related party......... 0 0 0 0 0 55,382
Decrease (increase) in
prepaid expenses...... 27,548 0 27,548 0 1,811 0
Decrease in net
investment in direct
financing leases...... 787,375 0 787,375 0 0 0
Increase in accrued
rental income......... (1,047,421) 0 (1,047,421) 0 0 0
Decrease (increase) in
intangibles and other
assets................ -- -- -- (30,554) -- 7,942
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 306,277 0 306,277 (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 0 71,853 25,550 0 0
Decrease in accrued
interest.............. 0 0 0 0 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 386,365 0 386,365 0 0 0
Increase (decrease) in
deferred rental
income................ 862,647 0 862,647 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Total adjustments...... 3,114,959 349,465 3,464,424 (1,183,414) (344,708) (37,064,802)
------------- ------------ ------------- ----------- --------- ------------
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)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 0 0 0 0
Additions to land and
buildings on operating
leases................ (77,028,830) (58,749,637)(e) (135,778,467) (31,577) (10,092) 0
Investment in direct
financing leases...... (29,608,346) 0 (29,608,346) 0 0 0
Investment in joint
venture............... (117,662) 0 (117,662) 0 0 0
Acquisition of
businesses............ -- -- -- -- -- --
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 134,981
Investment in mortgage
notes receivable...... (1,388,463) 0 (1,388,463) 0 0 0
Collections on mortgage
note receivable....... 75,010 0 75,010 0 0 0
Investment in notes
receivable............ (1,087,483) 0 (1,087,483) 0 0 0
Collection on notes
receivable............ 239,596 0 239,596 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... 0 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) investing
activities............ (108,916,178) (58,749,637) (167,665,815) (31,577) (10,092) 134,981
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,735 0 210,735 1,288,673 20,572 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,142,237) 0 (1,142,237) 0 0 0
Payment of stock
issuance costs........ (722,001) 0 (722,001) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 36,587,245 33,656,518 (e) 70,243,763 0 0 49,730,934
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (2,385) (10,291,473)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (8,610) 0 (8,610) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0 0
Distributions to
stockholders.......... (14,237,405) 0 (14,237,405) 0 0 0
Other.................. (200,234) 0 (200,234) 0 0 (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
Cash at beginning of
year................... 123,199,837 0 123,199,837 713,308 962,573 2,526,078
------------- ------------ ------------- ----------- --------- ------------
Cash at end of year..... $ 35,796,119 $(22,753,966) $ 13,042,153 $ 591,712 $ 552,415 $ 4,896,688
============= ============ ============= =========== ========= ============
</TABLE>
F-30
<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>
Combining
Pro Forma Historical Pro Forma Adjusted
Adjustments Combined APF Income Funds Adjustments Pro Forma
----------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(1,193,529)(a) $ 10,888,205 $ 700,531 $ 22,658(a) $ 11,611,394
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 0 1,937,859 72,294 39,234 (b) 2,049,387
Amortization expense... 535,335 (c) 993,638 0 0 993,638
Minority interest in
income of consolidated
joint venture......... 0 7,763 1,879 0 9,642
Equity in earnings of
joint ventures, net of
distributions......... 0 23,234 27,036 14,244 (d) 64,514
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 (74,640) 0 (74,640)
Provision for loss on
land, buildings, and
direct financing
leases................ 0 142,631 0 0 142,631
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (709,615) 46,867 0 (662,748)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (449,580) 0 0 (449,580)
Investment in notes
receivable............ 0 (42,571,895) 0 0 (42,571,895)
Collections on notes
receivable............ 0 6,417,907 0 0 6,417,907
Increase in restricted
cash.................. 0 (402,461) 0 0 (402,461)
Decrease in due from
related party......... 0 55,382 0 0 55,382
Decrease (increase) in
prepaid expenses...... 0 29,359 (14,618) 0 14,741
Decrease in net
investment in direct
financing leases...... 0 787,375 52,412 0 839,787
Increase in accrued
rental income......... 0 (1,047,421) (25,071) 0 (1,072,492)
Decrease (increase) in
intangibles and other
assets................ 0 (22,612) 0 0 (22,612)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (768,267) 50,339 0 (717,928)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 97,403 (19,399) 0 78,004
Decrease in accrued
interest.............. 0 (362,877) 0 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 0 386,365 23,492 0 409,857
Increase (decrease) in
deferred rental
income................ 0 862,647 0 0 862,647
----------- ------------- ---------- ----------- -------------
Total adjustments...... 535,335 (34,593,165) 140,591 53,478 (34,399,096)
----------- ------------- ---------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (658,194) (23,704,960) 841,122 76,136 (22,787,702)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 1,150,000 0 1,150,000
Additions to land and
buildings on operating
leases................ (135,820,136) (1,257,217) (137,077,353)
Investment in direct
financing leases...... 0 (29,608,346) 0 0 (29,608,346)
Investment in joint
venture............... 0 (117,662) (802,431) 0 (920,093)
Acquisition of
businesses............ (7,957,745)(f) (7,957,745) (2,745,255)(g) (11,184,000)
(481,000)(g)
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 134,981 0 0 134,981
Investment in mortgage
notes receivable...... 0 (1,388,463) 0 0 (1,388,463)
Collections on mortgage
note receivable....... 0 75,010 0 0 75,010
Investment in notes
receivable............ 0 (1,087,483) 0 0 (1,087,483)
Collection on notes
receivable............ 0 239,596 0 0 239,596
Decrease in restricted
cash.................. 0 0 359,990 0 359,990
Increase in intangibles
and other assets...... 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 0 0 0
----------- ------------- ---------- ----------- -------------
Net cash provided by
(used in) investing
activities............ (7,957,745) (175,530,248) (549,658) (3,226,255) (179,306,161)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 1,519,980 0 0 1,519,980
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,142,237) 0 0 (1,142,237)
Payment of stock
issuance costs........ 0 (722,001) 0 0 (722,001)
Proceeds from borrowing
on line of
credit/notes payable.. 0 119,974,697 0 0 119,974,697
Payment on line of
credit/notes payable.. 0 (22,874,147) 0 0 (22,874,147)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (8,610) (2,178) 0 (10,788)
Distributions to
limited partners...... 0 0 (900,001) 0 (900,001)
Distributions to
stockholders.......... 0 (14,237,405) 0 0 (14,237,405)
Other.................. 0 (209,836) 0 0 (209,836)
----------- ------------- ---------- ----------- -------------
Net cash provided by
(used in) financing
activities............ 0 82,300,441 (902,179) 0 81,398,262
Net increase in cash.... (8,615,939) (116,934,767) (610,715) (3,150,119) (120,695,601)
Cash at beginning of
year................... 0 127,401,796 1,835,972 0 129,237,768
----------- ------------- ---------- ----------- -------------
Cash at end of year..... $(8,615,939) $ 10,467,029 $1,225,257 $(3,150,119) $ 8,542,167
=========== ============= ========== =========== =============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 32,152,408 $ 19,030,497 (a) $ 51,182,905 $10,656,379 $(468,133) $ 427,134
Adjustments to reconcile
net income(loss) to net
cash provided by (used
in) operating
activities:
Depreciation........... 4,042,290 2,889,368 (b) 6,931,658 119,923 79,234 0
Amortization expense... 11,808 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in ........ 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) (2,187,652) 0 0 0
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 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 693,372 0 0 0
------------- ------------ ------------- ----------- ---------- -------------
Total adjustments...... 6,963,867 2,889,368 9,853,235 (3,608,563) 316,963 1,610,591
------------- ------------ ------------- ----------- ---------- -------------
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
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (58,749,637)(e) (258,851,304) (381,671) (236,372) 0
Investment in direct
financing leases...... (47,115,435) (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) (974,696) 0 0 0
Acquisition of
businesses............
Purchase of other
investments........... (16,083,055) (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) (6,281,069) 0 0 0
0 0 0 0 0
Other.................. 0 0 200,000 0 0
------------- ------------ ------------- ----------- ---------- -------------
Net cash provided by
(used in) investing
activities............ (277,338,756) (58,749,637) (336,088,393) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0
0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 33,656,518 (e) 41,348,558 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) (34,073) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0
Distributions to
stockholders.......... (39,449,149) (39,449,149) (9,364,488) 0 0
Other.................. (95,101) (95,101) 0 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
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
============= ============ ============= =========== ========== =============
</TABLE>
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF FundX, Ltd. Adjustments Pro Forma
------------ ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(16,348,580)(a) $ 45,449,705 $1,878,858 $ 90,377 (a) $ 47,418,940
Adjustments to reconcile
net income(loss) to net
cash provided by(used
in) operating
activities:
Depreciation........... (340,898)(b) 6,789,917 259,866 156,936 (b) 7,206,719
Amortization expense... 2,141,338 (c) 4,455,422 0 4,455,422
Minority interest in
income of consolidated
joint venture......... 30,156 9,302 39,458
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 80,991 56,976 (d) 122,527
Loss(gain) on sale of
land, building, net
investment in ........ 0 (218,960) (218,960)
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 1,009,576 1,001,846 2,011,422
Gain on
securitization........ (3,356,538) 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 265,871,668 0 265,871,668
Decrease(increase) in
other receivables..... (2,543,413) 14,199 (2,529,214)
Increase in accrued
interest income
included in notes
receivable............ (170,492) 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0
Investment in notes
receivable............ (288,590,674) 0 (288,590,674)
Collections on notes
receivable............ 23,539,641 0 23,539,641
Decrease in restricted
cash.................. 2,504,091 0 2,504,091
Decrease(increase) in
due from related
party................. (953,688) 0 (953,688)
Increase in prepaid
expenses.............. 7,246 648 7,894
Decrease in net
investment in direct
financing leases...... 1,971,634 219,237 2,190,871
Increase in accrued
rental income......... (2,187,652) 300,791 (1,886,861)
Increase in intangibles
and other assets...... (154,351) (2,380) (156,731)
Increase(decrease) in
accounts payable,
accrued expenses and
other
liabilities........... 846,680 (3,996) 842,684
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. (133,364) 25,041 (108,323)
Increase in accrued
interest.............. (77,968) 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 38,995 475,838
Decrease in deferred
rental income......... 693,372 0 693,372
------------ ------------- ---------- ----------- -------------
Total adjustments...... 1,800,440 9,972,666 1,725,580 213,912 11,912,158
------------ ------------- ---------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (14,548,140) 55,422,371 3,604,438 304,289 59,331,098
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 1,591,794 3,977,735
Additions to land and
buildings on operating
leases................ (259,469,347) (1,020,329) (260,489,676)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435)
Investment in joint
venture............... (974,696) 0 (974,696)
Acquisition of
businesses............ (7,957,745)(f) (7,957,745) (2,745,255)(g) (11,184,000)
(481,000)(g)
Purchase of other
investments........... (16,083,055) 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 295,514 0 295,514
Proceeds from retained
interest and
securities, excluding
investment
income................ 212,821 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648)
Collections on mortgage
note receivable....... 291,990 0 291,990
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750)
Collections on
equipment notes
receivable............ 3,046,873 0 3,046,873
Decrease in restricted
cash.................. 0 (237,758) (237,758)
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069)
0 0 0
Other.................. 200,000 3,006 203,006
------------ ------------- ---------- ----------- -------------
Net cash provided by
(used in) investing
activities............ (7,957,745) (342,172,606) 336,713 (3,226,255) (345,062,148)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 386,592,011 0 386,592,011
Contributions from
limited partners...... 0 0 0
0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925)
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 455,102,478 0 455,102,478
Payment on line of
credit/notes payable.. (411,813,826) 0 (411,813,826)
Retirement of shares of
common stock.......... (639,528) 0 (639,528)
Distributions to
holders of minority
interest.............. (34,073) (9,058) (43,131)
Distributions to
limited partners...... 0 (3,680,004) (3,680,004)
Distributions to
stockholders.......... (48,813,637) 0 (48,813,637)
Other.................. (2,595,088) 0 (2,595,088)
------------ ------------- ---------- ----------- -------------
Net cash provided
by(used in) financing
activities............ 0 338,643,762 (3,689,062) 0 334,954,700
Net increase (decrease)
in cash................ (22,505,885) 51,893,527 252,089 (2,921,966) 49,223,650
Cash at beginning of
year................... 49,829,130 1,583,883 51,413,013
------------ ------------- ---------- ----------- -------------
Cash at end of year..... (22,505,885) 101,722,657 $1,835,972 $(2,921,966) $ 100,636,663
============ ============= ========== =========== =============
</TABLE>
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of 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 Income Fund. This unaudited pro forma financial
information has been prepared utilizing the historical financial statements of
APF and the historical combined financial information of the Advisor, CNL
Restaurant Financial Services Group and the Income Fund and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, the Advisor the CNL Restaurant Financial Services Group and the Income
Fund. The Pro Forma Balance Sheet was prepared as if the transactions described
above occurred on 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 Fund 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 Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
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
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
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.
(B) Represents the effect of recording the acquisitions of the Advisor,
the CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Shares Offered.......... 3,800,000 2,350,000 2,097,571.2 8,247,571.2
Exchange Value.......... $ 20 $ 20 $ 20 $ 20
----------- ----------- ----------- ------------
Share Consideration..... $76,000,000 $47,000,000 $41,951,424 $164,951,424
Cash Consideration...... -- -- 481,000 481,000
APF Transaction Costs... 4,916,980 3,040,764 2,745,256 10,703,000
----------- ----------- ----------- ------------
Total Purchase Price.. $80,916,980 $50,040,764 $45,177,680 $176,135,424
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 7,141,252 $10,006,878 $33,153,427 $ 50,301,557
Purchase Price
Adjustments:
Land and buildings on
operating leases....... 9,390,389 9,390,389
Net investment in direct
financing leases....... 2,395,937 2,395,937
Investment in joint
ventures............... 1,660,495 1,660,495
Accrued rental income... (1,367,237) (1,367,237)
Intangibles and other
assets................. (2,792,876) (55,331) (2,848,207)
Goodwill*............... 42,826,762 -- 42,826,762
Excess purchase price... 73,775,728 -- -- 73,775,728
----------- ----------- ----------- ------------
Total Allocation...... $80,916,980 $50,040,764 $45,177,680 $176,135,424
=========== =========== =========== ============
</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 pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,775,728 was
expensed at March 31, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations". Goodwill of 42,826,762 relating to the acquisition
of the CNL Financial Services Group is being amortized over 20 years. APF
did not acquire any intangibles as part of any of the acquisitions. The
entries were as follows:
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
<TABLE>
<S> <C> <C>
1. Common Stock (CFA, CFS, CFC)--Class A............. 8,600
Common Stock (CFA, CFS, CFC)--Class B............... 4,825
APIC (CFA, CFS, CFC)................................ 13,857,645
Retained Earnings................................... 3,277,060
Accumulated distributions in excess of earnings..... 73,775,728
Goodwill for CFC (Intangibles and other assets)..... 42,826,762
CFC/CFS Org Costs/Other Assets..................... 2,792,876
Cash to pay APF transaction costs.................. 7,957,744
APF Common Stock................................... 61,500
APF APIC........................................... 122,938,500
(To record acquisition of CFA, CFS and CFC)
</TABLE>
<TABLE>
<S> <C> <C>
2. Partners Capital.................................... 33,153,427
Land and buildings on operating leases................ 9,390,389
Net investment in direct financing leases............. 2,395,937
Investment in joint ventures.......................... 1,660,495
Accrued rental income................................ 1,367,237
Intangibles and other assets......................... 55,331
Cash to pay APF Transaction costs.................... 2,745,256
Cash consideration to Income Fund.................... 481,000
APF Common Stock..................................... 20,976
APF APIC............................................. 41,930,448
(To record acquisition of Income Fund)
</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 Income Fund of $10,588 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, 1999.
(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.
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund:
<TABLE>
<S> <C>
Origination fees from affiliates............................. $ (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 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
</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>
(g) Represents the elimination of $292,786 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to in
footnote (4).
<TABLE>
<S> <C>
Amortization of goodwill....................................... $535,335
</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 $66,794 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms for
the leases acquired from the Income Fund as if the leases had been acquired
on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................... $ 0
Reimbursement of administrative costs......................... (11,668)
--------
$(11,668)
========
</TABLE>
(l) Represents the elimination of $11,668 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $17,995 in historical professional services
and administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $8,653 resulting from
assuming that acquisitions of properties that had been operational when APF
acquired them from January 1, 1999 through May 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 Fund 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 $39,234 as a
result of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the Acquisition
of the Income Fund under the purchase accounting method. The adjustment to
the basis of the buildings is being depreciated using the straight-line
method over the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense of
$14,244 as a result of adjusting the historical basis of the real estate
owned by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method. The
adjustment to the basis of the buildings owned indirectly by the Income
Fund is being depreciated using the straight-line method over the remaining
useful lives of the properties.
(r) Common shares issued during the period required to fund acquisitions
as if they had been acquired on January 1, 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.
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(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.
(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
Advisor, the CNL Restaurant Financial Services Group and the Income Fund:
<TABLE>
<S> <C>
Origination fees from affiliates.............................. $ (1,773,406)
Secured equipment lease fees.................................. (54,998)
Advisory fees................................................. (305,030)
Reimbursement of administrative costs......................... (408,762)
Acquisition fees.............................................. (21,794,386)
Underwriting fees............................................. (388,491)
Administrative, executive and guarantee fees.................. (1,233,043)
Servicing fees................................................ (1,570,331)
Development fees.............................................. (229,153)
Management fees............................................... (1,851,004)
------------
Total....................................................... $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL Financial
Corp. On a historical basis, CNL Financial Services, Inc. records all of
the loan origination fees received as revenue. For purposes of presenting
pro forma financial statements of these entities on a combined basis, these
loan origination fees are required to be deferred and amortized into
revenues over the term of the loans originated in accordance with generally
accepted accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the year ended December
31, 1998, which were deferred for pro forma purposes as described in
5(II)(c). These deferred loan origination fees are being amortized and
recorded as interest income over the terms of the underlying loans (15
years).
<TABLE>
<S> <C>
Interest income..................................................... $207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs associated
with the acquisition, development and leasing of properties
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
acquired during the period as if costs relating to properties developed by
APF were subject to capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs............................... $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees................................................ $(1,851,004)
Administrative executive and guarantee fees.................... (1,233,043)
Servicing fees................................................. (1,269,357)
Advisory fees.................................................. (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(g) Represents the elimination of $2,161,897 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to in
footnote (4)
<TABLE>
<S> <C>
Amortization of goodwill......................................... $2,141,338
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure that
exists within APF. APF expects to continue to qualify as a REIT and does
not expect to incur federal income taxes.
(j) Represents $267,176 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms for
the leases acquired from the Income Fund as if the leases had been acquired
on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees................................................... $ 0
Reimbursement of administrative costs............................. (34,727)
--------
$(34,727)
========
</TABLE>
(l) Represents the elimination of $34,727 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $50,158 in historical professional services
and administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $13,045 resulting from
assuming that acquisitions of properties that had been operational when APF
acquired them from January 1, 1998 through 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 Fund had
been issued as of January 1, 1998 and that these entities had operated
under a REIT structure as of January 1, 1998.
F-40
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(p) Represents an increase in depreciation expense of $156,936 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Income Fund through joint venture or tenancy in common
arrangements with affiliates or unrelated third parties, to fair value as a
result by the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method. The
adjustment to the basis of the buildings is being depreciated using the
straight-line method over the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense of
$56,976 as a result of adjusting the historical basis of the real estate
owned by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method. The
adjustment to the basis of the buildings owned indirectly by the Income
Fund is being depreciated using the straight-line method over the remaining
useful lives of the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF and the
Advisor which on a historical basis were capitalized as part of the basis
of the building.
(s) Common shares issued during the period required to fund acquisitions
as if they had been acquired on January 1, 1998 were assumed to have been
issued and outstanding as of January 1, 1998. For
purposes of the pro forma financial statements, it is assumed that the
stockholders approved a reverse stock split proposal and a proposal to
increase the number of authorized common shares of APF on January 1, 1998.
(t) 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 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.
F-41
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the use of cash i) to pay for the cash consideration
proposed in the offer to acquire the Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non-Cash Investing Activities
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B)
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the use of amounts borrowed under APF's credit facility
and the use of cash to 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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non-Cash Investing Activities
On January 1, 1998, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
F-42
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund X, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund X, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
A-1
<PAGE>
(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
A-2
<PAGE>
Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
A-3
<PAGE>
Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among by and among CNL American Properties Fund,
Inc., a Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware
limited partnership (the "Operating Partnership"), CNL APF GP corp., a Delaware
corporation (the "OP General Partner"), CNL Income Fund X, Ltd., a Florida
limited partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr.,
and CNL Realty Corporation, a Florida corporation (together with Messrs. Borne
and Seneff, the "General Partners"). APF, the Operating Partnership, the OP
General Partner, the Fund and the General Partners are referred to collectively
herein as the "Parties" and individually as a "Party."
Recitals:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund will
be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
Agreement:
1. AMENDMENTS TO MERGER AGREEMENT
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its
entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its
entirety and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and
restated as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against
the Merger and affirmatively elect the note option, such limited partners
shall be entitled to receive, in lieu of the Share Consideration, notes
(the "Notes") in the aggregate amount equal to 97% of the value (based on
the Exchange Value as defined in the Registration Statement) of the Share
Consideration such Dissenting Partners would have otherwise received had
such partners not elected to receive the Notes (the "Note Option"). The
Notes will mature on the fifth anniversary of the Closing Date and will
bear interest at a fixed rate equal to seven percent. The aggregate Share
Consideration shall be reduced on a one-for-basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners
not elected the Note Option."
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2
is hereby deleted and replaced with March 31, 2000.
1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to Dissenting
Limited Partners shall not have exceeded 15% of the value of the Share
Consideration based on the Exchange Value."
B-1
<PAGE>
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3
is hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2
is hereby deleted and replaced with "March 31, 2000."
2. GENERAL
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts,
each of which shall be deemed an original but all of which together will
constitute one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to
any choice or conflict of law provision or rules (whether of the State of
Florida or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Florida.
B-2
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
By: /s/ James M. Seneff, Jr.
Its: Chairman and 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 X, 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
B-3
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund X, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
B-4
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 4,243,243 fully paid and nonassessable APF Common
Shares (2,121,622 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $38,583,104, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 56,756,757 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 4,000,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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<PAGE>
(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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<PAGE>
from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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<PAGE>
Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $4,243,243 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $424,324 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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<PAGE>
14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
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 X, 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
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<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND XI, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund XI, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This Supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly-owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999, and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties, APF has the
ability to offer a complete range of restaurant property services to operators
of national and regional restaurant chains, from triple-net leasing and
mortgage financing to site selection, construction management and build-to-suit
development. If APF acquires all of the Income Funds in the Acquisition, APF
expects to have total assets of approximately $1.5 billion at the time of the
consummation of the Acquisition and will be one of the largest triple-net lease
REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 2,197,098 APF Shares. You will receive your
pro rata portion of such shares in accordance with the terms of your Income
Fund's partnership agreement. APF has assigned a value, which we refer to as
the exchange value, of $20.00 per share for the APF Shares. Because the APF
Shares are not listed on the NYSE at this time, the value at which an APF Share
may trade is uncertain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for trading on
the NYSE. We do not know the value at which an APF Share will trade on the NYSE
upon listing. It is possible that the APF Shares will trade at prices
substantially below the exchange value. APF has, however, recently sold $750
million of APF Shares through three public offerings. In each offering, the
offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
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<PAGE>
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At March 31, 1999, APF has invested all of the net offering proceeds to acquire
restaurant properties, to make mortgage loans and to pay fees and other
expenses.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the Acquisition?
There are a number of material risks and considerations that you should
consider, including:
.Uncertainty as to the value at which APF Shares will trade following
listing.
. We have material conflicts in light of our being both general partners
of the Income Funds and members of APF's Board of Directors.
.Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
.As stated below, the Acquisition is a taxable transaction.
.The acquisition involves a fundamental change in your investment.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding limited partnership units. Such an approval
by your Income Fund's Limited Partners will be binding on you even if you vote
against the Acquisition.
Did you receive a fairness opinion in connection with APF's acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
with respect to the fairness, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent, which is printed on the colored
paper, form how you want to vote, and sign and mail it in the enclosed postage-
paid return envelope as soon as possible, so that at the special meeting of
Limited Partners, your units may be voted "For" or "Against" APF's acquisition
of your Income Fund. If you prefer, you may instead vote by telephone,
following the instructions on your consent form. If you sign and send in your
consent form and do not indicate how you want to vote, your consent form will
be counted as a vote "For" the Acquisition. If you do not vote or you abstain
from voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due
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<PAGE>
, 2004 in an amount equal to 97% of your portion of the APF Share
consideration, based on the exchange value, that would otherwise have been paid
to your Income Fund. Please note that you may only receive the notes option if
you vote "Against" the Acquisition, and you elect to receive notes on your
consent form. You will receive APF Shares if your Income Fund elects to be
acquired in the Acquisition and you vote "For" the Acquisition, or you vote
"Against" the Acquisition and do not affirmatively select the notes option on
your consent form. In addition, if Limited Partners in your Income Fund elect
to receive notes in an amount greater than 15% of the estimated value of APF
Shares, based on the exchange value, to be paid to your Income Fund, then APF
has the right to decline to acquire your Income Fund. The notes will not be
listed on any exchange or automated quotation system, and a market for the
notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are a person
subject to income taxation or a tax-paying entity and you receive APF Shares,
the tax that you must pay will generally be based on the difference between the
value of the APF Shares you receive and the tax basis of your units. If you
elect to receive notes, your tax will be based upon your allocable share of the
gain which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Some of
the gain may be subject to the 25% rate of tax applicable to certain types of
real property gain.
We urge you to consult with your tax advisor to evaluate the taxes that will
be incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the gain per average
original $10,000 investment in your Income Fund will be $1,880. To review the
tax consequences to the Limited Partners of the Income Funds in greater detail,
see pages 180 through 194 of the consent solicitation and "Federal Income Tax
Considerations" in this supplement.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds acquired by
APF may be differently constructed, located in a different geographic area or
of a different restaurant chain than the restaurant properties owned by your
Income Fund. Because the market for real estate may vary from one region of the
country to another, the change in geographic diversity may expose you to
different and greater risks than those to which you are presently exposed. For
geographic information regarding APF's and the Income Funds' restaurant
properties, see "APF's Business and The Restaurant Properties--Business
Objectives and Strategies" and "--The Restaurant Properties--General" and
"Business of the Income Funds--Description of Restaurant Properties" in the
consent solicitation.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund. This description is qualified in its entirety
by the more detailed discussion in the section entitled "Risk Factors"
contained in the consent solicitation.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease below the exchange value upon listing.
Your Income Fund will be receiving 2,197,098 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices
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substantially below the exchange value or the historical per share book value
of the assets of APF. The APF Shares have been approved for listing on the
NYSE, subject to official notice of issuance. Prior to listing, the existing
APF stockholders have not had an active trading market in which they could sell
their APF Shares. Additionally, any Limited Partners of the Income Funds who
become APF stockholders as a result of the Acquisition, will have transformed
their investment in non-tradable units into an investment in freely tradable
APF Shares. Consequently, some of these stockholders may choose to sell their
APF Shares upon listing at a time when demand for APF Shares may be relatively
low. The market price of the APF Shares may be volatile after the Acquisition,
and the APF Shares could trade at prices substantially less than the exchange
value as a result of increased selling activity following the issuance of the
APF Shares, the interest level of investors in purchasing the APF Shares after
the Acquisition and the amount of distributions to be paid by APF.
Your distribution may decrease
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund made, $885, $885 and $905, respectively, in distributions per $10,000
investment to you. While historically, APF has made distributions equal to
7.62% per APF Share, based on the exchange value, we cannot be sure that APF
will be able to maintain this level of distributions in the future. In the
event that APF is unable to maintain this level of distributions in the future,
your distributions per $10,000 investment may decrease substantially after the
Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have three material conflicts of interest in of the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne, have a different interest in the completion of the Acquisition
which may conflict with your interest as a Limited Partner of the Income Fund
or with their own positions as the general partners of your Income Fund.
Second, assuming only your Income Fund is acquired in the Acquisition, we will
receive 21,152 APF Shares. Finally, in the event that your Income Fund is not
acquired, however, we, as the general partners of your Income Fund, may be
required to pay all or a substantial portion of the Acquisition costs allocated
to your Income Fund to the extent that you or other Limited Partners of your
Income Fund vote against the Acquisition. For additional information regarding
the Acquisition costs allocated to your Income Fund, see "Comparison of
Alternative Effect on Financial Condition and Results of Operations" contained
in this supplement.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own and lease on a triple-net basis, on the date that the Acquisition
is consummated, assuming only your Income Fund was acquired as of March 31,
1999, 553 restaurant properties. The risks inherent in investing in an
operating company such as APF include that APF may invest in new restaurant
properties that are not as profitable as APF anticipated, may incur substantial
indebtedness to make future acquisitions of restaurant properties which it may
be unable to repay and may make mortgage loans to prospective operators of
national and regional restaurant chains which may not have the ability to
repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a
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sale or refinancing of your Income Fund's assets, to an investment in an entity
in which you may realize the value of your investment only through sale of your
APF Shares, not from liquidation proceeds from restaurant properties.
Continuation of your Income Fund would, on the other hand, permit you
eventually to receive liquidation proceeds from the sale of the Income Fund's
restaurant properties, and your share of these sale proceeds, if any, could be
higher than the amount realized from the sale of your APF Shares or from the
combination of cash paid to and payments on any notes if you elect to receive
the notes.
Real Estate/Business Risks
If APF's borrower's default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default 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 effect 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 prepayment 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. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
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APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholders distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
March 31, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.62x and its ratio of debt-to-total assets was
28.01. If only your Income Fund were acquired as of that date, APF's debt
service ratio would have been 3.79x and its ratio of debt-to-total assets would
have been 26.87%. Up through the time immediately prior to the consummation of
the Acquisition, as a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former limited partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is based primarily on the acquisition and development
of additional restaurant properties. We do not know that APF will do so
successfully because APF may have difficulty finding new restaurant properties,
negotiating with new or existing tenants or securing acceptable financing. In
addition, investing in additional restaurant properties is subject to many
risks. For instance, if an additional restaurant property is in a market in
which APF has not invested before, APF will have relatively little experience
in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgages. APF
typically does not require that a third party guarantee the obligations of the
tenant or the borrower. The ability of the tenants or borrowers to pay their
obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to: (1)
national, regional and local economic conditions which may be adversely
affected by industry slowdowns, employer relocations, prevailing employment
conditions and other factors, and which may reduce consumer demand for the
products offered by APF's customers; (2) local real estate conditions; (3)
changes or weaknesses in specific industry segments; (4) perceptions by
prospective customers of the safety, convenience, services and attractiveness
of the restaurant chain; (5) changes in demographics, consumer tastes and
traffic patterns; (6) the ability to obtain and retain capable management; (7)
changes in laws, building codes, similar ordinances and other legal
requirements, including laws increasing the potential liability for
environmental conditions existing on properties; (8) the inability of a
particular restaurant chain's computer system, or that of its franchisor or
vendors, to adequately address Year 2000 issues; (9) increases in operating
expenses; and (10) increases in minimum wages, taxes, including income,
service, real estate and other taxes or mandatory employee benefits.
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APF has tenants of two significant restaurant chains that have filed for
bankruptcy protection.
The fact that APF has tenants of two significant restaurant chains that have
filed for bankruptcy protection may adversely affect APF's total rental, earned
and interest income. Because all of APF's properties are leased on a triple-net
basis, if a tenant has defaulted on its lease obligations or has declared
bankruptcy, it would reduce APF's rental, earned and interest income until APF
could lease those affected properties to a new tenant or tenants. As of March
31, 1999, your Income Fund had no tenants under bankruptcy protection, and
therefore, assuming that your Income Fund is acquired by APF, you, as an APF
stockholder or noteholder, may be subject to the adverse consequences
associated with having tenants under bankruptcy protection.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as a stockholder, would be reduced substantially for
each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to certain adjustments that are unique to REITs, a REIT generally
must distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
For a more detailed discussion of the risks associated with the Acquisition,
see "Risk Factors" in the consent solicitation.
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<PAGE>
CONSIDERATION PAID TO INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth information regarding the value of the
consideration that your Income Fund will receive in the Acquisition. The APF
Shares payable to your Income Fund will not change if APF acquires fewer than
all of the Income Funds in the Acquisition. This data assumes that none of the
Limited Partners of your Income Fund have elected to receive the notes. You
should note that the APF Shares may trade at prices significantly below the
exchange value upon listing on the NYSE.
<TABLE>
<CAPTION>
Original Original Limited
Limited Partner Investments Estimated Value
Partner Less Any Estimated of APF Shares
Investments Distributions of Estimated Value of per
Less Any Net Sales Proceeds Number of Value of APF Shares Average $10,000
Distributions per $10,000 APF Shares APF Shares Estimated after Original
of Net Sales Original Offered to Payable to Acquisition Acquisition Limited Partner
Proceeds (1) Investment(1) Income Fund Income Fund Expenses Expenses Investment
- ------------- ------------------- ----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$40,000,000 $10,000 2,197,098 $43,941,960 $477,000 $43,464,960 $10,761
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2004. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2004. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest. For more detailed information, see "The Acquisition" and
"Description of the Notes" in the consent solicitation.
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<PAGE>
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(/1/)................................................. $ 24,971
Appraisals and Valuation(/2/)................................... 6,435
Fairness Opinions(/3/).......................................... 30,000
Solicitation Fees(/4/).......................................... 17,440
Printing and Mailing(/5/)....................................... 113,848
Accounting and Other Fees(/6/).................................. 53,407
--------
Subtotal...................................................... 246,101
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(/7/)..................... 105,944
Legal Closing Fees(/8/)......................................... 52,331
Partnership Liquidation Costs(/9/).............................. 72,624
--------
Subtotal...................................................... 230,899
--------
Total........................................................... $477,000
========
</TABLE>
--------
(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $312,063. Your
Income Fund's pro-rata portion of these fees was determined based
on the percentage of the value of the APF Share consideration
payable to your Income Fund, based on the exchange value, to the
total value of the APF Share consideration payable to all of the
Income Funds, based on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of
the Income Funds in connection with the Acquisition were $105,420.
Your Income Fund's pro-rata portion of these fees was determined
based on number of restaurant properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and
incurred a fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $249,626. Your
Income Fund's pro-rata portion of these fees was determined based
on the number of Limited Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to be
$1,610,399. Your Income Fund's pro-rata portion of these fees was
determined based on the number of Limited Partners in your Income
Fund.
(6) Aggregate accounting and other fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to be
$683,904. Your Income Fund's pro-rata portion of these fees was
determined based on the percentage of your Income Fund's total
assets as of March 31, 1999 to the total assets of all of the
Income Funds as of March 31, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by
all of the Income Funds in connection with the Acquisition is
estimated to be $1,312,808. Your Income Fund's pro-rata portion of
these fees was determined based on the percentage of the value of
the APF Share consideration payable to your Income Fund, based on
the exchange value, to the total value of the APF Share
consideration payable to all of the Income Funds, based on the
exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,454. Your
Income Fund's pro-rata portion of these fees was determined based
on the percentage of your Income Fund's total assets as of March
31, 1999 to the total assets of all of the Income Funds as of
March 31, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of
the Income Funds in connection with the Acquisition is estimated
to be $895,326. Your Income Fund's pro-rata portion of these costs
was determined based on the percentage of the value of the APF
Share consideration payable to your Income Fund, based on the
exchange value, to the total value of the APF Share consideration
payable to all of the Income Funds, based on the exchange value.
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The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For the purposes of the Acquisition, the term "Solicitation Fees" includes
costs such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTES
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 80% or more in value of the Income Fund's
restaurant properties acquired within two years of the initial date of the
prospectus (March 12, 1992). Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding units.
Required Amendment to the Partnership Agreement
Your Income Fund's partnership agreement includes one provision that may
prevent the successful completion of APF's Acquisition of your Income Fund.
This provision must be amended in order to successfully complete the
Acquisition. Therefore, if you vote "For" the Acquisition, you will also be
asked to vote in favor of this amendment. The proposed amendment is summarized
below:
. Amendment to Roll-Up Prohibition. Article 21 of the partnership agreement
currently provides that your Income Fund may not participate in any
transaction involving (i) the acquisition, merger, conversion or
consolidation, either directly or indirectly, of your Income Fund, and
(ii) the issuance of securities of any other partnership, real estate
investment trust, corporation, trust or other entity that would be
created or would survive after the successful completion of such
transaction.
If the Limited Partners holding a majority of the units approve this
amendment to your Income Fund's partnership agreement your Income Fund, Article
21 will be deleted in its entirety.
Partnership Agreement Amendment Procedures
Pursuant to Article 13 of your Income Fund's partnership agreement, we may
propose amendments to the partnership agreement. Article 13 of the partnership
agreement requires that we furnish you with a verbatim statement of the
proposed amendment, which is attached to this supplement as Appendix C, and to
include an opinion of our counsel regarding whether the proposed amendment
would result in changing your Income Fund to a general partnership, changing
our liability or your liability, or allowing you to take part in the control or
management of your Income Fund. The form of opinion of Baker & Hostetler, LLP
attached to this supplement as Appendix D.
Consequence of Failure to Approve the Acquisition or the Amendments
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition and the proposed
amendment to the partnership agreement, the Acquisition may not be consummated
under the terms of the partnership agreement. In such event, we plan to
continue to
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operate your Income Fund as a going concern and to eventually dispose of your
Income Fund's restaurant properties approximately 7 to 12 years after they were
acquired or as soon thereafter if, in our opinion, market conditions permit, as
contemplated by the terms of the partnership agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at
. We and members of APF's management
intend to solicit actively your support for the Acquisition and would like to
use the special meeting to answer questions about the Acquisition and the
solicitation materials and to explain in person our reasons for recommending
that you vote "For" the Acquisition.
VOTING PROCEDURE
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain their votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning on attending the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about
, 1999 and will continue until the later of (a) , 1999, a
date not less than 60 calendar days from the initial delivery of the
solicitation materials, or (b) such later date as we may select and as to which
we give you notice. At our discretion, we may elect to extend the solicitation
period. Under no circumstances will the solicitation period be extended beyond
March 31, 2000. Any consent form received by Corporate Election Services prior
to 5:00 p.m., Eastern time, on the last day of the solicitation period will be
effective provided that such consent form has been properly completed and
signed. If you fail to return a signed consent form by the end of the
solicitation period, your units will be counted as voting "Against" the
Acquisition of your Income Fund and you will receive APF Shares if your Income
Fund is acquired. If you prefer, you may instead vote by telephone according to
the instructions on your consent form.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
S-11
<PAGE>
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the quarter
ended March 31, 1999, the aggregate amounts accrued or paid by your Income Fund
to us are shown below under "Historical Distributions Paid to the General
Partners and Affiliates" and the estimated amounts of compensation that would
have been paid had the Acquisition been in effect for the periods presented,
are shown below under "Pro Forma Distributions to Be Paid to the General
Partners Following the Acquisition":
<TABLE>
<CAPTION>
Quarter
Ended
Year Ended December 31, March
-------------------------- 31,
1996 1997 1998 1999
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the
General Partners and Affiliates:
General Partner Distributions............ -- -- -- --
Accounting and Administrative Services... $ 95,845 $ 88,667 $101,423 $26,271
Property Management Fees................. $ 37,293 $ 37,974 $ 39,393 $ 9,476
Broker/Dealer Commissions................ -- -- -- --
Due Diligence and Marketing Support
Fees.................................... -- -- -- --
Acquisition Fees......................... -- -- -- --
Asset Management Fees.................... -- -- -- --
Real Estate Disposition Fees(1).......... -- -- -- --
-------- -------- -------- -------
Total historical....................... $133,138 $126,641 $140,816 $35,747
Pro Forma Distributions to be Paid to the
General Partners Following the
Acquisition:
Cash Distributions on APF Shares......... 31,381 24,353 40,839 9,197
Salary Compensation...................... N/A N/A
-------- -------- -------- -------
Total pro forma........................ $ 31,381 $ 24,353 $ 40,839 $ 9,197
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to certain minimum
returns to the Limited Partners. To date, no such fees have been paid since
the required minimum returns have not been made to the Limited Partners.
S-12
<PAGE>
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
contained herein under the caption "Financial Statements" and in the consent
solicitation under the caption "Summary--Our Reasons for Supporting the
Acquisition--Prices for Income Fund Units."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31, 1999
------------------------ --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income....... $810 $793 $858 $816 $905 $181 $137
Distributions from Return of
Capital........................ 46 92 27 69 -- 38 97
---- ---- ---- ---- ---- ---- ----
Total......................... $856 $885 $885 $885 $905 $219 $234
==== ==== ==== ==== ==== ==== ====
</TABLE>
Cash distributions for the year ended December 31, 1997 include $40,000 of
amounts earned in 1997 but declared payable in the first quarter of 1998.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses during 1999. Thus, the pro forma information regarding
the distributions to APF stockholders for the quarter ended March 31, 1999 is
not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
.the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the Acquisition
with those of several alternatives, the Acquisition is more economically
attractive to you and the other Limited Partners than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to certain closing conditions. Second, if your Income Fund is acquired,
all Limited Partners of your Income Fund who vote against the acquisition will
be given the option of receiving APF Shares or notes.
S-13
<PAGE>
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others, that we will be relieved
from certain ongoing liabilities with respect to the Income Fund if it is
acquired by APF. For a further discussion of the conflicts of interest and
potential benefits of the Acquisition to us, see "Conflicts of Interest" below.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. In addition, we compared the
values of the consideration which would have been received by you and the other
Limited Partners in alternative transactions and concluded that the Acquisition
is fair based on such comparison. We believe the Acquisition is the best way to
maximize the return on your investment because of your ability to participate
in the potential appreciation of APF Shares. Since the investment in your
Income Fund is an investment in a static portfolio due to restrictions
contained in your Income Fund's partnership agreement and limited capital
resources, your investments have less of an opportunity to appreciate. Because
APF is a growth-oriented operating company, you will have the opportunity as an
APF stockholder to participate in APF's future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinions of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinions of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) notwithstanding that Legg
Mason has previously provided investment banking services to the Income Funds
and to Commercial Net Lease Realty, Inc., an affiliate of CNL Group Inc., and
(3) Valuation Associates has previously performed valuation appraisals for APF.
See "Reports, Opinions and Appraisals" in the consent solicitation.
On rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to, any other
aspect of the Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition or
the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
S-14
<PAGE>
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Legg Mason's opinion also does not compare the relative merits of the
Acquisition with those of any other transaction or business strategy which were
or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares will exceed the going concern value and
liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Net Book Value of the Income Fund. We calculated the book value of your
Income Fund under generally accepted accounting principles, or GAAP, as of
March 31, 1999 per average $10,000 original investment. Since the calculation
of the book value was done on a GAAP basis, it is primarily based on historical
cost and, therefore, it is not indicative of the true fair market value of your
Income Fund. This figure was compared to three other figures:
(1) the value of the Income Fund if it commenced an orderly liquidation of
its investment portfolio on December 31, 1998,
(2) the value of the Income Fund if it continued to operate in accordance
with its existing partnership agreement and business plans, and
(3) the estimated value of the APF Shares, based on the exchange value,
paid to each Income Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated
Original Value of APF
Limited Partner Shares per
Investment Less GAAP Going Average $10,000
any Distributions Book Liquidation Concern Original Limited
on Sales Proceeds(1) Value Value(2) Value(2) Partner Investment
-------------------- ------ ----------- -------- ------------------
<S> <C> <C> <C> <C> <C>
CNL Income Fund XI,
Ltd. .................. 10,000 $8,578 $10,000 $10,729 $10,761
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
(2) Liquidation and going concern values were based on appraisals prepared by
Valuation Associates. For a complete description of the methodologies
employed by Valuation Associates, see "Reports, Opinions and Appraisals" in
the consent solicitation.
S-15
<PAGE>
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have contractual
obligations pursuant to your Income Fund's partnership agreement as well as
state law to assess whether the terms of the Acquisition are fair and equitable
to the Limited Partners of your Income Fund without regard to whether the
Acquisition is fair and equitable to any of the other participants, including
the Limited Partners in other Income Funds. James M. Seneff, Jr. and Robert A.
Bourne act as the individual general partners of all of the Income Funds and
also as members of the Board of Directors of APF. While Messrs. Seneff and
Bourne have sought faithfully to discharge their obligations to your Income
Fund, there is an inherent conflict of interest in serving, directly or
indirectly, in a similar capacity with respect to your Income Fund and also on
APF's Board of Directors.
Lack of Independent Representation
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received. If an independent representative
had been retained for the Income Funds, either collectively or on an individual
basis, the fees and expenses of the Acquisition would have been higher. No
group of Limited Partners was empowered to negotiate the terms and conditions
of the Acquisition or to determine what procedures should be used to protect
the rights and interest of the Limited Partners. In addition, no investment
banker, attorney, financial consultant or expert was engaged to represent the
interest of the Limited Partners. We have been the parties responsible for
structuring all the terms and conditions of the Acquisition. Legal counsel
engaged to assist with the preparation of the documentation for the
Acquisition, including this consent solicitation, was engaged by us and did not
serve, or purport to serve, as legal counsel for the Income Funds or Limited
Partners. If an independent representative had been retained for the Income
Funds, the terms of the Acquisition may have been different and possibly more
favorable to the Limited Partners. In particular, had separate representation
for each of the Income Funds been arranged by us, issues unique to the value of
each of the specific Income Funds might have been highlighted or received
greater attention, resulting in adjustments to the value assigned to the assets
of such Income Funds and increasing the number of APF Shares or notes that
would be allocable to such Income Fund if acquired in the Acquisition.
Substantial Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive three material benefits. These benefits include:
. With respect to our ownership in your Income Fund, we may be issued up
to 21,152 APF Shares in the aggregate in accordance with the terms of
your Income Fund's partnership agreement. The 21,152 APF Shares issued
to us will have an estimated value, based on the exchange value, of
approximately $423,040.
. James M. Seneff, Jr. and Robert A. Bourne your individual general
partners, will also continue to serve as directors of APF with Mr.
Seneff serving as Chairman of APF. Furthermore, they will be entitled to
receive stock options, under APF's 1999 Performance Incentive Plan or
any other such plan approved by the stockholders. The benefits that may
be realized by Messrs. Seneff and Bourne are likely to exceed the
benefits that they would expect to derive from the Income Funds if the
Acquisition does not occur.
. As general partners of the Income Funds, we are legally liable for all
of Income Funds liabilities to the extent that the Income Funds are
unable to satisfy such liabilities. Because the partnership agreement
for each Income Fund prohibits the Income Funds from incurring
indebtedness, the only liabilities the Income Funds have are liabilities
with respect to their ongoing business operations. In the event that one
or more Income Funds are acquired by APF, we would be relieved of our
legal obligation to satisfy the liabilities of the acquired Income Fund
or Income Funds.
S-16
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Certain Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund. If
your Income Fund is acquired by APF, and you have voted "For" the Acquisition,
you will receive APF Shares. If you have voted "Against" the Acquisition but
your Income Fund is acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under certain circumstances, even
if APF were to make the same level of distributions as your Income Fund, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you. For certain other differences attributable to APF's status as a REIT,
see "--Taxation of APF" and "--Taxation of Stockholders--Taxable Domestic
Stockholders" in the consent solicitation.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF, the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain and loss based on the
exchange value, for an average $10,000 original Limited Partner investment in
your Income Fund, is set forth in the table below for those Limited Partners
subject to federal income taxation.
S-17
<PAGE>
<TABLE>
<CAPTION>
Estimated
Gain/(Loss) per
Average $10,000
Original Limited
Partner Investment(1)
---------------------
<S> <C>
CNL Income Fund XI, Ltd. ................................. $1,880
</TABLE>
- --------
(1) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be significantly below the exchange value.
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one more individuals or entities in exchange for the stock of that corporation,
and (2) immediately after the exchange, such individuals or entities are in
control of the corporation. For purposes of section 351(a), control is defined
as the ownership of stock possessing at least 80 percent of the total combined
voting power of all classes of stock entitled to vote and at least 80 percent
of the total number of shares of all other classes of stock of the corporation.
APF has represented to Shaw Pittman, APF's tax counsel, that, following the
Acquisition, the Limited Partners of the Income Funds will not own stock
possessing at least 80 percent of the total combined voting power of all
classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if
any, assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares, and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2004, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231
S-18
<PAGE>
gains and losses that you recognize in that year. If the result is a net loss,
such loss is characterized as an ordinary loss. If the result is a net gain, it
is characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the Cash/Notes Option may decrease the
amount of gain your Income Fund recognizes, the electing Limited Partner still
will be required to take into account his, her or its share of your Income
Fund's gain as determined under the partnership agreement of your Income Fund.
Therefore, Limited Partners who elect the notes may recognize gain in the year
of the Acquisition despite the fact that they will not receive cash with which
to pay the tax on the gain. Such Limited Partners will adjust the basis of the
notes as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes. See "--Tax Consequences of Liquidation and
Termination of Your Income Fund" below.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares and/or notes, as the case may be, to you.
The taxable year of your Income Fund will end at this time, and you must
report, in your taxable year that includes the date of the Acquisition, your
share of all income, gain, loss, deduction and credit for your Income Fund
through the date of the Acquisition, including gain or loss resulting from the
Acquisition. If your taxable year is not the calendar year, you could be
required to recognize as income in a single taxable year your share of your
Income Fund's income attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units and your holding period for
the notes for purposes of determining capital gain or loss from the disposition
of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17) or
(20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
S-19
<PAGE>
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
For a discussion of the taxation of APF, see "Federal Income Tax
Considerations--Taxation of APF" in the consent solicitation.
S-20
<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 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 2,307,364 1,391,466 8,137 (2,450,663)(b),(c)
Interest and
Other Income..... 2,214,763 0 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 0 1,095,269 2,563,714 1,323,577 64,186 (377,734)(e)
Management and
Advisory Fees.... 697,364 0 697,364 0 0 611,196 (1,308,560)(f)
Fees to Related
Parties.......... 0 0 0 23,326 292,575 0 (292,786)(g)
Interest
Expense.......... 0 0 0 50,730 0 4,769,268 0
State Taxes...... 235,208 0 235,208 0 0 0 0
Depreciation--
Other............ 0 0 0 39,581 26,238 0 0
Depreciation--
Property......... 1,548,813 349,465(a) 1,898,278 0 0 0 0
Amortization..... 7,368 0 7,368 0 0 0 534,991 (h)
Transaction
Costs............ 125,926 0 125,926 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
Total Expenses.. 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650 (1,444,089)
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) $ (944,506)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 0 17,271 0 0 0 0
Gain on Sale of
Properties....... 0 0 0 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 (215,797) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
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) (944,506)
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) $(1,193,185)
=========== ========== =========== ========== ========== ========== ===========
<CAPTION>
Historical Acquisition
Combined CNL Income Pro Forma Adjusted
APF Fund XI, Ltd. Adjustments Pro Forma
------------ ------------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $14,523,161 $ 899,271 $ 15,420 (j) $15,437,852
Fees............. 1,256,304 0 (24,231)(k) 1,232,073
Interest and
Other Income..... 7,687,325 20,934 0 7,708,259
------------ ------------- ------------------ ------------
Total Revenue... $23,466,790 $920,205 $ (8,811) $24,378,184
Expenses:
General and
Administrative... 4,669,012 53,198 (25,220)(l),(m) 4,696,990
Management and
Advisory Fees.... 0 9,476 (9,476)(n) 0
Fees to Related
Parties.......... 23,115 0 0 23,115
Interest
Expense.......... 4,819,998 0 0 4,819,998
State Taxes...... 235,208 28,189 8,961 (o) 272,358
Depreciation--
Other............ 65,819 0 0 65,819
Depreciation--
Property......... 1,898,278 106,646 52,691 (p) 2,057,615
Amortization..... 542,359 0 0 542,359
Transaction
Costs............ 125,926 34,967 0 160,893
------------ ------------- ------------------ ------------
Total Expenses.. 12,379,715 232,476 26,956 12,639,147
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties and
Provision for
Losses on
Properties....... $11,087,075 $ 687,729 $ (35,767) $11,739,037
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 41,592 (13,379)(q) 45,484
Gain on Sale of
Properties....... 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 0 (215,797)
------------ ------------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit
(Provision) for
Federal Income
Taxes............ 10,888,549 729,321 (49,146) 11,568,724
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ------------- ------------------ ------------
Net
Earnings(Losses).. $10,888,549 $ 729,321 $ (49,146) $11,568,724
============ ============= ================== ============
</TABLE>
S-21
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
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
============ =========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 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
============ =========== ============ ========== ========== ============ ===========
Weighted average
units
outstanding
during period... n/a n/a n/a n/a n/a n/a n/a
============ =========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,401 n/a 37,347,401 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 n/a 37,348,464 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... 14,237,405 n/a n/a n/a n/a n/a n/a
Cash
distributions
declared per
$10,000
Investment...... 191 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 $ -- $ -- $ -- $ 0
Mortgages/notes
receivable...... $ 41,269,740 0 $ 41,269,740 $ -- $ -- $247,896,287 $ 0
Receivables,
net............. $ 548,862 0 $ 548,862 $7,141,967 $5,457,493 $ 1,969,339 $ (148,629)(w)
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 $31,971,973 (v1),(w)
Total
liabilities/minority
interest........ $ 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 $32,392,343 (v1)(x)
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund XI, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- ------------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 542 40 n/a 582
============== =========== ==================== ==================
Earnings per
share/unit...... $ n/a $ 0.18 $ n/a $ 0.25
============== =========== ==================== ==================
Book value per
share/unit...... $ n/a $ 8.58 $ n/a $ 16.42
============== =========== ==================== ==================
Dividends per
share/unit...... $ n/a $ 0.22 $ n/a $ n/a
============== =========== ==================== ==================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 3.27x
============== =========== ==================== ==================
Weighted average
units
outstanding
during period... n/a 4,000,000 n/a n/a
============== =========== ==================== ==================
Weighted average
shares
outstanding
during period... 43,497,401 n/a 2,173,248 45,670,649 (r)
============== =========== ==================== ==================
Shares
outstanding..... 43,498,464 n/a 2,173,248 45,671,712
============== =========== ==================== ==================
Cash
distributions
declared:....... n/a 875,006 n/a $ 19,858,027 (s)
==================
Cash
distributions
declared per
$10,000
Investment...... n/a 200 n/a $ 217 (t)
==================
Balance sheet
data:
Real estate
assets, net..... $ 647,547,023 $29,370,297 $12,499,572 (v2) $ 689,416,892
Mortgages/notes
receivable...... $ 289,166,027 $ -- $ 0 $ 289,166,027
Receivables,
net............. $ 14,969,032 $ 36,172 $ (11,398)(y) $ 14,993,806
Investment
in/due from
joint ventures.. $ 1,083,564 $ 2,759,981 $ 1,760,980 (v2) $ 5,604,525
Total assets.... $1,053,555,295 $35,852,393 $ 9,141,630 (v2),(y) $1,098,549,318
Total
liabilities/minority
interest........ 346,929,801 $ 1,540,466 $ (11,398)(y) $ 348,458,869
Total equity.... $ 706,625,494 $34,311,927 $ 9,153,028 (v2) $ 750,090,449
</TABLE>
S-22
<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 Advisor,
the CNL Restaurant Financial Services Group and the Income Fund:
<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 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
</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>
(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)
<TABLE>
<S> <C>
Amortization of goodwill....................................... $534,991
</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 $15,420 in accrued rental income resulting from the straight-
lining of scheduled rent increases throughout the lease terms for the
leases acquired from the Income Fund as if the leases had been acquired on
January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income Fund:
<TABLE>
<S> <C>
Management fees.............................................. $ (9,476)
Reimbursement of administrative costs........................ (14,755)
---------
$ (24,231)
=========
</TABLE>
(l) Represents the elimination of $14,755 in administrative costs reimbursed by
the Income Fund to the Advisor.
S-23
<PAGE>
(m) Represents savings of $10,465 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 $9,476 in management fees by the Income Fund
to the Advisor.
(o) Represents additional state income taxes of $8,961 resulting from assuming
that acquisitions of properties that had been operational when APF acquired
them from January 1, 1999 through May 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 Fund 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 $52,691 as a result of
adjusting the historical basis of the real estate wholly owned by the
Income Fund to fair value as a result of accounting for the Acquisition of
the Income Fund under the purchase accounting method. The adjustment to the
basis of the buildings is being depreciated using the straight-line method
over the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $13,379 as a
result of adjusting the historical basis of the real estate owned by the
Income Fund, indirectly through joint venture or tenancy in common
arrangements, to fair value as a result of accounting for the Acquisition
of the Income Fund under the purchase accounting method. The adjustment to
the basis of the buildings owned indirectly by the Income Fund is being
depreciated using the straight-line method over the remaining useful lives
of the properties.
(r) Common shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 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 Fund using the purchase
accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Shares Offered.......... 3,800,000 2,350,000 2,173,247.75 8,323,247.75
Exchange Value.......... $ 20 $ 20 $ 20 $ 20
----------- ----------- ------------ ------------
Share Consideration..... $76,000,000 $47,000,000 $ 43,464,955 $166,464,955
Cash Consideration...... -- -- 477,000 477,000
APF Transaction Costs... 4,872,520 3,013,269 2,817,211 10,703,000
----------- ----------- ------------ ------------
Total Purchase Price... $80,872,520 $50,013,269 $ 46,759,166 $177,644,955
=========== =========== ============ ============
Allocation of Purchase
Price:
Net Assets--
Historical............ $ 7,141,252 $10,006,878 $ 34,311,927 $ 51,460,057
Purchase Price
Adjustments:
Land and buildings on
operating leases...... 9,958,646 9,958,646
Net investment in
direct financing
leases................ 2,540,926 2,540,926
Investment in joint
ventures.............. 1,760,980 1,760,980
Accrued rental income.. (1,677,835) (1,677,835)
Intangibles and other
assets................ (2,792,876) (135,478) (2,928,354)
Goodwill*.............. 42,799,267 -- 42,799,267
Excess purchase price.. 73,731,268 -- -- 73,731,268
----------- ----------- ------------ ------------
Total Allocation....... $80,872,520 $50,013,269 $ 46,759,166 $177,644,955
=========== =========== ============ ============
</TABLE>
--------
* Goodwill represents the portion of the purchase price which is
assumed to relate to the ongoing value of the debt business.
S-24
<PAGE>
The APF Transaction costs of $10,703,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,731,268 was
expensed at March 31, 1999 because the Advisor has not been deemed to qualify
as a "business" for purposes of applying APB Opinion No. 16, "Business
Combinations". Goodwill of $42,799,267 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..................................... 73,731,268
Goodwill for CFC (Intangibles and other
assets)...................................... 42,799,267
CFC/CFS Org Costs/Other Assets............... 2,792,876
Cash to pay APF transaction costs............ 7,885,789
APF Common Stock............................. 61,500
APF APIC..................................... 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital............................. 34,311,927
Land and buildings on operating leases........ 9,958,646
Net investment in direct financing leases..... 2,540,926
Investment in joint ventures.................. 1,760,980
Accrued rental income........................ 1,677,835
Intangibles and other assets................. 135,478
Cash to pay APF Transaction costs............ 2,817,211
Cash consideration to Income Fund............ 477,000
APF Common Stock............................. 21,732
APF APIC..................................... 43,443,223
(To record acquisition of Income Fund)
</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 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.
(y) Represents the elimination by the Income Fund of $11,398 in related party
payables recorded as receivables by the Advisor.
S-25
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND XI, LTD.
The following table sets forth certain financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
XI, Ltd." in this supplement.
<TABLE>
<CAPTION>
Quarter Ended
March 31, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue (1)............. $ 961,797 $ 937,707 $ 4,067,454 $ 3,998,538 $ 3,976,787 $ 3,920,528 $ 3,933,435
Net income (2).......... 729,321 755,956 3,809,404 3,295,079 3,464,705 3,202,176 3,272,492
Cash distributions
declared (3)........... 875,006 915,006 3,660,024 3,500,024 3,540,024 3,540,023 3,425,007
Net income per unit (2)
....................... 0.18 0.19 0.94 0.82 0.86 0.79 0.81
Cash distributions
declared per
unit (3) .............. 0.22 0.23 0.92 0.88 0.89 0.89 0.86
GAAP book value per
unit................... 8.58 8.54 8.61 8.58 8.63 8.65 8.73
Weighted average number
of Limited Partner
units outstanding...... 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
<CAPTION>
March 31, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets ........... $35,852,393 $35,715,756 $36,103,592 $35,785,538 $36,003,045 $36,086,683 $36,335,476
Total partners'
capital................ 34,311,927 34,149,182 34,457,612 34,308,232 34,513,177 34,588,496 34,926,343
</TABLE>
- --------
(1) Revenues include equity in earnings of unconsolidated joint ventures and
minority interest in income of consolidated joint ventures.
(2) Net income for the years ended December 31, 1998 and 1996, include $461,861
and $213,685, respectively, from a gain on sale of land and buildings.
(3) Distributions for the year ended December 31, 1998, include special
distributions to the Limited Partners of $40,000 and $120,000 declared
during the quarters ended March 31, and December 31, respectively, which
represented cumulative excess operating reserves. Distributions for the
year ended December 31, 1996, includes a special distribution to the
Limited Partners of $40,000, which represented cumulative excess operating
reserves.
S-26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND XI, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
August 20, 1991, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurants, as well as
properties upon which restaurants were to be constructed, which are leased
primarily to operators of national and regional fast-food and family-style
restaurant chains. The leases are triple-net leases, with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of 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.
S-27
<PAGE>
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.
S-28
<PAGE>
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,
S-29
<PAGE>
$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.
S-30
<PAGE>
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
S-31
<PAGE>
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.
S-32
<PAGE>
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.
S-33
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998....... F-1
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998..................................................................... F-2
Condensed Statements of Partner's Capital for the Quarter Ended March 31,
1999 and for the Year Ended December 31, 1998 ........................... F-3
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998................................................................. F-4
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998 ........................................................... F-5
Report of Independent Accountants......................................... F-7
Balance Sheets as of December 31, 1998 and 1997........................... F-8
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-9
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996............................................................ F-10
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................. F-12
Unaudited Pro Forma Financial Information................................. F-20
Unaudited Pro Forma Balance Sheet as of March 31, 1999.................... F-21
Unaudited Pro Forma Statement of Earnings for the Quarter Ended March 31,
1999..................................................................... F-23
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998..................................................................... F-26
Unaudited Pro Forma Statement of Cash Flows for the Quarter Ended March
31, 1999................................................................. F-27
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................. F-29
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-31
</TABLE>
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
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-1
<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-2
<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-3
<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-4
<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-5
<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. 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-6
<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-7
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $21,683,785 $23,561,017
Net investment in direct financing leases............. 6,786,286 6,611,661
Investment in joint ventures.......................... 2,521,613 2,567,786
Cash and cash equivalents............................. 1,559,240 1,272,386
Restricted cash....................................... 1,640,936 --
Receivables, less allowance for doubtful accounts
$5,820 in 1998....................................... 132,311 119,575
Prepaid expenses...................................... 12,335 13,363
Accrued rental income................................. 1,645,062 1,517,726
Other assets.......................................... 122,024 122,024
----------- -----------
$36,103,592 $35,785,538
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 14,461 $ 6,508
Accrued and escrowed real estate taxes payable........ 15,138 19,410
Distributions payable................................. 995,006 875,006
Due to related parties................................ 25,446 6,648
Rents paid in advance and deposits.................... 92,069 68,333
----------- -----------
Total liabilities................................... 1,142,120 975,905
Minority interests.................................... 503,860 501,401
Partners' capital..................................... 34,457,612 34,308,232
----------- -----------
$36,103,592 $35,785,538
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases...... $2,644,418 $2,702,558 $2,765,327
Earned income from direct financing
leases.................................. 893,187 841,426 850,650
Contingent rental income................. 243,115 225,888 251,312
Interest and other income................ 139,707 62,440 61,403
---------- ---------- ----------
3,920,427 3,832,312 3,928,692
---------- ---------- ----------
Expenses:
General operating and administrative..... 154,434 148,380 164,642
Professional services.................... 34,140 32,077 30,984
Management fees to related parties....... 39,393 37,974 37,293
Real estate taxes........................ 2,858 -- --
State and other taxes.................... 24,262 25,779 14,650
Depreciation and amortization............ 443,936 459,249 478,198
Transaction costs........................ 20,888 -- --
---------- ---------- ----------
719,911 703,459 725,767
---------- ---------- ----------
Income Before Minority Interests in Income
of Consolidated Joint Ventures, Equity in
Earnings of Unconsolidated Joint Ventures
and Gain on Sale of Land and Buildings.... 3,200,516 3,128,853 3,202,925
Minority Interests in Income of
Consolidated Joint Ventures............... (68,474) (69,877) (70,116)
Equity in Earnings of Unconsolidated Joint
Ventures.................................. 215,501 236,103 118,211
Gain on Sale of Land and Buildings......... 461,861 -- 213,685
---------- ---------- ----------
Net Income................................. $3,809,404 $3,295,079 $3,464,705
========== ========== ==========
Allocation of Net Income:
General partners......................... $ 34,815 $ 32,951 $ 33,356
Limited partners......................... 3,774,589 3,262,128 3,431,349
---------- ---------- ----------
$3,809,404 $3,295,079 $3,464,705
========== ========== ==========
Net Income Per Limited Partner Unit........ $ 0.94 $ 0.82 $ 0.86
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding......................... 4,000,000 4,000,000 4,000,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $108,925 $40,000,000 $(11,515,062) $10,783,633 $(4,790,000) $34,588,496
Distributions to
limited partners
($0.89 per limited
partners unit)........ -- -- -- (3,540,024) -- -- (3,540,024)
Net income............. -- 33,356 -- -- 3,431,349 -- 3,464,705
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 142,281 40,000,000 (15,055,086) 14,214,982 (4,790,000) 34,513,177
Distributions to
limited partners
($0.88 per limited
partners unit)........ -- -- -- (3,500,024) -- -- (3,500,024)
Net income............. -- 32,951 -- -- 3,262,128 -- 3,295,079
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 175,232 40,000,000 (18,555,110) 17,477,110 (4,790,000) 34,308,232
Distributions to
limited partners
($0.92 per limited
partners unit)........ -- -- -- (3,660,024) -- -- (3,660,024)
Net income............. -- 34,815 -- -- 3,774,589 -- 3,809,404
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $210,047 $40,000,000 $(22,215,134) $21,251,699 $(4,790,000) $34,457,612
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants................ $3,826,352 $3,585,979 $3,657,138
Distributions from unconsolidated joint
ventures................................. 262,843 250,497 148,375
Cash paid for expenses.................... (247,138) (237,312) (251,408)
Interest received......................... 52,005 43,632 47,609
---------- ---------- ----------
Net cash provided by operating
activities.............................. 3,894,062 3,642,796 3,601,714
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings.. 1,630,296 -- 1,044,750
Investment in joint ventures.............. (1,169) (1,044,750) --
Decrease (increase) in restricted cash.... (1,630,296) 1,044,750 (1,044,750)
---------- ---------- ----------
Net cash used in investing activities.... (1,169) -- --
---------- ---------- ----------
Cash Flows From Financing Activities:
Distributions to limited partners......... (3,540,024) (3,540,024) (3,540,024)
Distributions to holders of minority
interests................................ (66,015) (56,246) (58,718)
---------- ---------- ----------
Net cash used in financing activities.... (3,606,039) (3,596,270) (3,598,742)
---------- ---------- ----------
Net Increase in Cash and Cash Equivalents.. 286,854 46,526 2,972
Cash and Cash Equivalents at Beginning of
Year...................................... 1,272,386 1,225,860 1,222,888
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $1,559,240 $1,272,386 $1,225,860
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income................................ $3,809,404 $3,295,079 $3,464,705
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.............................. 443,936 458,660 476,198
Amortization.............................. -- 589 2,000
Gain on sale of land and buildings........ (461,861) -- (213,685)
Minority interests in income of
consolidated joint ventures.............. 68,474 69,877 70,116
Equity in earnings of unconsolidated joint
ventures, net of distributions........... 47,342 14,394 30,164
Decrease (increase) in receivables........ (23,376) (23,957) 25,855
Decrease (increase) in prepaid expenses... 1,028 (136) 151
Decrease in net investment in direct
financing leases......................... 90,236 74,706 62,366
Increase in accrued rental income......... (127,336) (260,223) (296,439)
Increase in accounts payable and accrued
expenses................................. 3,681 2,143 4,280
Increase (decrease) in due to related
parties.................................. 18,798 4,527 (4,386)
Increase (decrease) in rents paid in
advance and deposits..................... 23,736 7,137 (19,611)
---------- ---------- ----------
Total adjustments........................ 84,658 347,717 137,009
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $3,894,062 $3,642,796 $3,601,714
========== ========== ==========
Supplemental Schedule of Non-Cash Financing
Activities:
Land and building under operating lease
exchanged for land and building
under operating lease.................... $ 718,930 $ -- $ --
========== ========== ==========
Distributions declared and unpaid at
December 31.............................. $ 995,006 $ 875,006 $ 915,006
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund XI, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to the fair
value. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
estimate of net cash flows expected to be generated from its properties and the
need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables and
F-12
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
accrued rental income, and to decrease rental or other income or increase bad
debt expense for the current period, although the Partnership continues to
pursue collection of such amounts. If amounts are subsequently determined to be
uncollectible, the corresponding receivable and allowance for doubtful accounts
are decreased accordingly.
Investment in Joint Ventures--The Partnership accounts for its 85 percent
interest in Denver Joint Venture and its 77.33% interest in CNL/Airport Joint
Venture using the consolidation method. Minority interests represent the
minority joint venture partners' proportionate share of equity in the
Partnership's consolidated joint ventures. All significant intercompany
accounts and transactions have been eliminated.
The Partnership's investments in Ashland Joint Venture and Des Moines Real
Estate Joint Venture, and a property in Corpus Christi, Texas, for which the
property is held as tenants-in-common, are accounted for using the equity
method since the Partnership shares control with affiliates which have the same
General Partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant use of management estimates relate to the
allowance for doubtful accounts and future cash flows associated with long-
lived assets. Actual results could differ from those estimates.
2. Leases:
The Partnership leases its land and buildings to operators of national and
regional fast-food and family-style restaurants. The leases are accounted for
under the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." Some of the leases are classified as operating leases
and some of the leases have been classified as direct financing leases. For the
leases classified as direct financing leases, the building portions of the
property leases are accounted for as direct financing leases while the land
portions of
F-13
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
the majority of these leases are operating leases. Substantially all leases are
for 14 to 20 years and provide for minimum and contingent rentals. In addition,
the tenant pays all property taxes and assessments, fully maintains the
interior and exterior of the building and carries insurance coverage for public
liability, property damage, fire and extended coverage. The lease options
generally allow tenants to renew the leases for two to five successive five-
year periods subject to the same terms and conditions as the initial lease.
Most leases also allow the tenant to purchase the property at fair market value
after a specified portion of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................ $11,607,426 $12,269,964
Buildings....................................... 12,666,144 13,746,182
----------- -----------
24,273,570 26,016,146
Less accumulated depreciation................... (2,589,785) (2,455,129)
----------- -----------
$21,683,785 $23,561,017
=========== ===========
</TABLE>
In September 1998, the tenant of the property in Columbus, Ohio, exercised
its option under the terms of its lease agreement, to exchange one existing
property with a replacement property. In conjunction therewith, the Partnership
exchanged the Burger King property in Columbus, Ohio, for a Burger King
property in Danbury, Connecticut. The lease for the property in Columbus, Ohio,
was amended to allow the property in Danbury, Connecticut to continue under the
terms of the original lease. All closing costs were paid by the tenant. The
Partnership accounted for this as a nonmonetary exchange of similar assets and
recorded the acquisition of the property in Danbury, Connecticut at the net
book value of the property in Columbus, Ohio. No gain or loss was recognized
due to this being accounted for as a nonmonetary exchange of similar assets.
In October 1998, the Partnership sold its property in Nashua, New Hampshire,
to a third party for $1,748,000, and received net sales proceeds of $1,630,296,
resulting in a gain of $461,861 for financial reporting purposes. This property
was originally acquired by the Partnership in 1992 at a cost of approximately
$1,302,400, excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the Partnership sold this property for a total of approximately
$327,900 in excess of its original purchase price.
Some leases provide for escalating guaranteed minimum rents throughout the
lease term. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998, 1997, and 1996, the Partnership recognized $127,336, $260,233 and
$296,439, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 2,426,198
2000.......................................................... 2,426,198
2001.......................................................... 2,435,203
2002.......................................................... 2,486,388
2003.......................................................... 2,644,398
Thereafter.................................................... 16,656,009
-----------
$29,074,394
===========
</TABLE>
F-14
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Minimum lease payments receivable............... $13,985,977 $13,834,907
Estimated residual values....................... 2,210,329 2,144,114
Less unearned income............................ (9,410,020) (9,367,360)
----------- -----------
Net investment in direct financing leases....... $ 6,786,286 $ 6,611,661
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 988,575
2000.......................................................... 988,575
2001.......................................................... 988,575
2002.......................................................... 999,775
2003.......................................................... 1,019,879
Thereafter.................................................... 9,000,598
-----------
$13,985,977
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
5. Investment in Joint Ventures:
The Partnership has a 62.16% and a 76.6% interest in the profits and losses
of Ashland Joint Venture and Des Moines Real Estate Joint Venture,
respectively. The remaining interests in these joint ventures are held by
affiliates of the Partnership which have the same general partners.
In January 1997, the Partnership acquired a 72.58% interest in a Black-eyed
Pea property in Corpus Christi, Texas, as tenants-in-common with an affiliate
of the general partners. The Partnership accounts for its investment in this
property using the equity method since the Partnership shares control with an
affiliate, and amounts relating to its investment are included in investment in
joint ventures.
F-15
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Ashland Joint Venture, Des Moines Real Estate Joint Venture and the
Partnership and affiliate, as tenants-in-common, each own and lease one
property to an operator of national fast-food restaurants. The following
presents the joint ventures' combined, condensed financial information at
December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less accumu-
lated depreciation................................. $3,427,681 $3,511,507
Cash................................................ 1,109 621
Receivables......................................... -- 21,638
Prepaid expenses.................................... 8,290 6,939
Accrued rental income............................... 130,585 99,429
Liabilities......................................... -- 466
Partners' capital................................... 3,567,665 3,639,668
Revenues............................................ 399,305 430,923
Net income.......................................... 300,036 334,962
</TABLE>
The Partnership recognized income totalling $215,501, $236,103, and $118,211
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
6. Restricted Cash:
As of December 31, 1998, the net sales proceeds of $1,630,296 from the sale
of the property in Nashua, New Hampshire, plus accrued interest of $10,640,
were being held in an interest-bearing escrow account pending the release of
funds by the escrow agent to acquire an additional property (See Note 11).
7. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their invested capital contributions (the "Limited Partners' 10% Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their Limited
Partners' 10% Return, plus the return of their adjusted capital contributions.
The general partners will then receive, to the extent previously subordinated
and unpaid, a one percent interest in all prior distributions of net cash flow
and a return of their capital contributions. Any remaining sales proceeds will
be distributed 95 percent to the limited partners and five percent to the
general partners. Any gain from the sale of a property not in liquidation of
the Partnership is, in general, allocated in the same manner as net sales
proceeds are distributable. Any loss from the sale of a property is, in
general, allocated first, on a pro rata basis, to partners with positive
balances in their capital accounts; and thereafter, 95 percent to the limited
partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership,
F-16
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
iii) third, to pay all of the Partnership's liabilities, if any, to the general
and limited partners, iv) fourth, after allocations of net income, gains and/or
losses, to distribute to the partners with positive capital accounts balances,
in proportion to such balances, up to amounts sufficient to reduce such
positive balances to zero, and v) thereafter, any funds remaining shall then be
distributed 95 percent to the limited partners and five percent to the general
partners.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
declared distributions to the limited partners of $3,660,024, $3,500,024 and
$3,540,024, respectively. No distributions have been made to the general
partners to date.
8. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes................................. $3,809,404 $3,295,079 $3,464,705
Depreciation for tax reporting purposes
less than (in excess of) depreciation for
financial reporting purposes............. 2,899 (43,077) (39,035)
Gain on sale of land and building for
financial reporting purposes in excess of
gain for tax reporting purposes.......... (461,861) -- (213,685)
Direct financing leases recorded as
operating leases for tax reporting
purposes................................. 90,236 74,706 62,366
Equity in earnings of unconsolidated joint
ventures for financial reporting purposes
in excess of equity in earnings of
unconsolidated joint ventures for tax
reporting purposes....................... (5,906) (13,296) (606)
Capitalization of transaction costs for
tax reporting purposes................... 20,888 -- --
Accrued rental income..................... (127,336) (260,223) (296,439)
Rents paid in advance..................... 23,236 22,436 (19,611)
Allowance for doubtful accounts........... 5,820 (14,746) (8,114)
Minority interests in timing differences
of consolidated joint ventures........... (44,316) 14,430 15,933
---------- ---------- ----------
Net income for federal income tax
purposes................................. $3,313,064 $3,075,309 $2,965,514
========== ========== ==========
</TABLE>
9. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors,
Inc. During the years ended December 31, 1998, 1997, and 1996, CNL Fund
Advisors, Inc. (hereinafter referred to as the "Affiliate") performed certain
services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate a management fee of one percent of the sum of gross
revenues from properties wholly owned by the Partnership and the Partnership's
allocable share of gross revenues from joint
F-17
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
ventures. The management fee, which will not exceed fees which are competitive
for similar services in the same geographic area, may or may not be taken, in
whole or in part as to any year, in the sole discretion of the Affiliate. The
Partnership incurred management fees of $39,393, $37,974, and $37,293 for the
years ended December 31, 1998, 1997, and 1996, respectively.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. The payment of the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate 10% Preferred Return,
plus their adjusted capital contributions. No deferred, subordinated real
estate disposition fees have been incurred since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $101,423, $88,667, and $95,845 for the
years ended December 31, 1998, 1997, and 1996, respectively, for such services.
During 1997, the Partnership and an affiliate of the general partners
acquired a property as tenants-in-common for a purchase price of $1,441,057 (of
which the Partnership contributed $1,044,750 or 72.50%) from CNL BB Corp., an
affiliate of the general partners. CNL BB Corp. had purchased and temporarily
held title to this property in order to facilitate the acquisition of the
property by the Partnership and the affiliate. The purchase price paid by the
Partnership and the affiliate represented the costs incurred by CNL BB Corp. to
acquire and carry the property, including closing costs.
The due to related parties at December 31, 1998 and 1997, totalled $25,446
and $6,648, respectively.
10. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of rental and earned income from the unconsolidated joint ventures and the
property held as tenants-in-common with an affiliate of the general partners),
for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Foodmaker, Inc...................................... $768,032 $768,032 $768,032
Burger King Corporation and BK Acquisition, Inc..... 695,427 733,620 712,334
Golden Corral Corporation........................... 564,104 538,871 538,355
DenAmerica Corporation.............................. 536,779 489,623 N/A
Advantica Restaurant Group, Inc. (Denny's, Inc. and
Quincy's Restaurants, Inc., during the year ended
December 31, 1998)................................. 473,726 N/A N/A
Flagstar Enterprises, Inc. (and Denny's, Inc. and
Quincy's Restaurants, Inc. during the years ended
December 31, 1997 and 1996)........................ N/A 780,502 774,347
</TABLE>
F-18
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from the unconsolidated joint ventures
and the property held as tenants-in-common with an affiliate of the general
partners), for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Burger King................................... $1,144,250 $1,198,027 $1,271,606
Denny's....................................... 898,908 854,141 747,341
Jack in the Box............................... 768,032 768,032 768,032
Golden Corral Family Steakhouse Restaurants... 564,103 538,871 538,355
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the Properties in a timely manner.
11. Subsequent Events:
In January 1999, the Partnership reinvested a portion of the net sales
proceeds it received from the sale of the property in Nashua, New Hampshire, in
a Burger King property located in Yelm, Washington, at an approximate cost of
$1,034,000. In connection therewith, the Partnership entered into a long term,
triple-net lease with terms substantially the same as its other leases.
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 4,394,196 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $43,333,961 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
12. Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 11 being adjusted to 2,197,098 shares valued at $20.00 per
APF share.
F-19
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of the Advisor
and the CNL Restaurant Financial Services Group, and the acquisition of the
Income Fund (the acquisition of the Income Fund is referred to as the
"Acquisition"), and is based on estimates and assumptions set forth below in
the notes to such information which included pro forma adjustments. This
unaudited pro forma financial information has been prepared utilizing the
historical financial statements of APF, the historical combined financial
information of the Income Fund, the Advisor and CNL Restaurant Financial
Services Group (shown separately as CFS and CFC) and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, Income Fund, Advisor and CNL Restaurant Financial Services Group. The
pro forma balance sheet assumes that the Acquisition occurred on 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.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-20
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of March 31, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL
Historical Pro Forma Historical Financial
APF Adjustments Subtotal Advisor Services, Inc.
------------ ----------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating
leases (net depreciation).. 475,787,661 58,749,637 (A) 534,537,298 0 0
Net Investment in Direct
Financing
Leases.................... 123,270,117 0 123,270,117 0 0
Mortgages and Notes
Receivable................ 41,269,740 0 41,269,740 0 0
Other Investments.......... 16,199,792 0 16,199,792 0 0
Investment In Joint
Ventures.................. 1,083,564 0 1,083,564 0 0
Cash and Cash Equivalents.. 35,796,119 (25,093,119)(A) 10,703,000 591,712 552,415
Restricted
Cash/Certificates of
Deposit................... 2,007,278 0 2,007,278 0 0
Receivables (net
allowances)
/Due from Related Party... 548,862 0 548,862 7,141,967 5,457,493
Accrued Rental Income...... 5,007,334 0 5,007,334 0 0
Other Assets............... 7,723,678 0 7,723,678 490,141 298,498
Goodwill................... 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Assets.............. $708,694,145 $33,656,518 $742,350,663 $8,223,820 $6,308,406
============ =========== ============ ========== ==========
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued
Liabilities............... $ 3,464,190 $ 0 $ 3,464,190 $ 576,531 $ 304,375
Accrued Construction Costs
Payable................... 10,172,169 0 10,172,169 0 0
Distributions Payable...... 0 0 0 119,808 0
Due to Related Parties..... 148,629 0 148,629 0 563,724
Income Tax Payable......... 0 0 0 0 0
Line of Credit/Notes
payable................... 34,150,000 33,656,518 (A) 67,806,518 386,229 0
Deferred Income............ 2,052,530 0 2,052,530 0 0
Rents Paid in Advance...... 1,340,636 0 1,340,636 0 0
Minority Interest.......... 280,970 0 280,970 0 0
Common Stock............... 373,483 0 373,483 0 0
Common Stock--Class A...... 0 0 0 6,400 2,000
Common Stock--Class B...... 0 0 0 3,600 724
Additional Paid-in-
capital................... 670,055,177 0 670,055,177 4,617,047 5,303,503
Accumulated distributions
in
excess of net earnings.... (13,293,639) 0 (13,293,639) 2,514,205 134,080
Partners Capital........... 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Liabilities and
Equity................... $708,694,145 $33,656,518 $742,350,663 $8,223,820 $6,308,406
============ =========== ============ ========== ==========
</TABLE>
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of March 31, 1999
<TABLE>
<CAPTION>
Historical Historical
CNL Combining CNL Income
Financial Pro Forma Combined Fund XI, Pro Forma Adjusted
Corp. Adjustments APF Ltd. Adjustments Pro Forma
------------ ------------ -------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... 0 0 534,537,298 21,914,945 9,958,646 (B2) 566,410,889
Net Investment in Direct
Financing Leases....... 0 0 123,270,117 7,455,352 2,540,926 (B2) 133,266,395
Mortgages and Notes
Receivable............. 247,896,287 0 289,166,027 -- 0 289,166,027
Other Investments....... 6,353,482 0 22,553,274 0 0 22,553,274
Investment In Joint
Ventures............... 0 0 1,083,564 2,759,981 1,760,980 (B2) 5,604,525
Cash and Cash
Equivalents............ 4,896,688 (7,885,789)(B1) 8,858,026 1,872,630 (2,817,211)(B2) 7,436,445
(477,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 853,243 0 2,860,521 -- 0 2,860,521
Receivables (net
allowances)
/Due from Related
Party.................. 1,969,339 (148,629)(C) 14,969,032 36,172 (11,398)(E) 14,993,806
Accrued Rental Income... 0 0 5,007,334 1,677,835 (1,677,835)(B2) 5,007,334
Other Assets............ 2,731,394 (2,792,876)(B1) 8,450,835 135,478 (135,478)(B2) 8,450,835
Goodwill................ 0 42,799,267 (B1) 42,799,267 0 0 42,799,267
------------ ------------ -------------- ----------- ------------ --------------
Total Assets........... $264,700,433 $ 31,971,973 $1,053,555,295 $35,852,393 $ 9,141,630 $1,098,549,318
============ ============ ============== =========== ============ ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 1,613,959 $ 0 $ 5,959,055 $ 59,252 $ 0 $ 6,018,307
Accrued Construction
Costs Payable.......... 0 0 10,172,169 0 0 10,172,169
Distributions Payable... 0 0 119,808 875,006 0 994,814
Due to Related Parties.. 31,310,681 (148,629)(C) 31,874,405 11,398 (11,398)(E) 31,874,405
Income Tax Payable...... 271,741 (271,741)(D) 0 0 0 0
Line of Credit/Notes
payable................ 226,937,481 0 295,130,228 0 0 295,130,228
Deferred Income......... 0 0 2,052,530 0 0 2,052,530
Rents Paid in Advance... 0 0 1,340,636 90,907 0 1,431,543
Minority Interest....... 0 0 280,970 503,903 0 784,873
Common Stock............ 0 61,500 (B1) 434,983 0 21,732 (B2) 456,715
Common Stock--Class A... 200 (8,600)(B1) 0 0 0 0
Common Stock--Class B... 501 (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 3,937,095 122,938,500 (B1) 792,943,677 0 43,443,223 (B2) 836,386,900
(13,857,645)(B1)
Accumulated
distributions in excess
of net earnings........ 628,775 (3,277,060)(B1) (86,753,166) 0 0 (86,753,166)
(73,731,268)(B1)
271,741 (D)
Partners Capital........ 0 0 0 34,311,927 (34,311,927)(B2) 0
------------ ------------ -------------- ----------- ------------ --------------
Total Liabilities and
Equity................ $264,700,433 $ 31,971,973 $1,053,555,295 $35,852,393 $ 9,141,630 $1,098,549,318
============ ============ ============== =========== ============ ==============
</TABLE>
F-22
<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
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $12,184,008 $2,339,153(a) $14,523,161 $ 0 $ 0 $ 0
Fees................... 0 0 0 2,307,364 1,391,466 8,137
Interest and Other
Income................ 2,214,763 0 2,214,763 47,213 129,362 5,233,919
----------- ---------- ----------- ---------- ---------- ----------
Total Revenue.......... $14,398,771 $2,339,153 $16,737,924 $2,354,577 $1,520,828 $5,242,056
Expenses:
General and
Administrative
Expenses.............. 1,095,269 0 1,095,269 2,563,714 1,323,577 64,186
Management and Advisory
Fees.................. 697,364 0 697,364 0 0 611,196
Fees Paid to Related
Parties............... 0 0 0 23,326 292,575 0
Interest Expense ...... 0 0 0 50,730 0 4,769,268
State Taxes............ 235,208 0 235,208 0 0 0
Depreciation--Other.... 0 0 0 39,581 26,238 0
Depreciation--
Property.............. 1,548,813 349,465(a) 1,898,278 0 0 0
Amortization........... 7,368 0 7,368 0 0 0
Transaction Costs...... 125,926 0 125,926 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
Total Expenses......... 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, 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)
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 17,271 0 17,271 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Provision For Loss on
Properties............ (215,797) 0 (215,797) 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
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)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 127,496 48,017 73,166
----------- ---------- ----------- ---------- ---------- ----------
Net Earnings (Losses)... $10,490,297 $1,989,688 $12,479,985 $ (195,278) $ (73,545) $ (129,428)
=========== ========== =========== ========== ========== ==========
Earnings Per
Share/Unit............. $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ==========
Book Value Per
Share/Unit............. $ 17.59 $ 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
=========== ========== =========== ========== ========== ==========
Ratio of Earnings to
Fixed Charges.......... 50.03x n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========== ==========
Wtd. Avg. Units
Outstanding............ 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
=========== ========== =========== ========== ========== ==========
Shares Outstanding...... 37,348,464 n/a 37,348,464 n/a n/a n/a
=========== ========== =========== ========== ========== ==========
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 Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Historical
Combining CNL
Pro Forma Combined Income Fund Pro Forma Adjusted
Adjustments APF XI, Ltd. Adjustments Pro Forma
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $14,523,161 $ 899,271 $ 15,420 (j) $ 15,437,852
Fees................... (2,450,663)(b),(c) 1,256,304 0 (24,231)(k) 1,232,073
Interest and Other
Income................ 62,068 (d) 7,687,325 20,934 0 7,708,259
----------- ----------- ---------- --------- ------------
Total Revenue.......... $(2,388,595) $23,466,790 $ 920,205 $ (8,811) $ 24,378,184
Expenses:
General and
Administrative
Expenses.............. (377,734)(e) 4,669,012 53,198 (25,220)(l),(m) 4,696,990
Management and Advisory
Fees.................. (1,308,560)(f) 0 9,476 (9,476)(n) 0
Fees Paid to Related
Parties............... (292,786)(g) 23,115 0 0 23,115
Interest Expense....... 0 4,819,998 0 0 4,819,998
State Taxes............ 0 235,208 28,189 8,961 (o) 272,358
Depreciation--Other.... 0 65,819 0 0 65,819
Depreciation--
Property.............. 0 1,898,278 106,646 52,691 (p) 2,057,615
Amortization........... 534,991 (h) 542,359 0 0 542,359
Transaction Costs...... 0 125,926 34,967 0 160,893
----------- ----------- ---------- --------- ------------
Total Expenses......... (1,444,089) 12,379,715 232,476 26,956 12,639,147
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties and
Provision for Losses on
Properties and Other
Expenses............... $ (944,506) $11,087,075 $ 687,729 $ (35,767) $ 11,739,037
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 0 17,271 41,592 (13,379)(q) 45,484
Gain on Sale of
Properties............ 0 0 0 0 0
Provision For Loss on
Properties............ 0 (215,797) 0 0 (215,797)
----------- ----------- ---------- --------- ------------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (944,506) 10,888,549 729,321 (49,146) 11,568,724
Benefit/(Provision) for
Federal Income Taxes.. (248,679)(i) 0 0 0 0
----------- ----------- ---------- --------- ------------
Net Earnings (Losses)... $(1,193,185) $10,888,549 $ 729,321 $ (49,146) $ 11,568,724
=========== =========== ========== ========= ============
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.18 $ n/a $ 0.25
=========== =========== ========== ========= ============
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.27x
=========== =========== ========== ========= ============
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.58 $ n/a $ 16.42
=========== =========== ========== ========= ============
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.22 $ n/a $ n/a
=========== =========== ========== ========= ============
Wtd. Avg. Units
Outstanding............ n/a n/a 4,000,000 n/a n/a
=========== =========== ========== ========= ============
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,401 n/a 2,173,248 45,670,649 (r)
=========== =========== ========== ========= ============
Shares Outstanding...... 6,150,000 43,498,464 n/a 2,173,248 45,671,712
=========== =========== ========== ========= ============
Calculation of Pro Forma
Distributions:
Pro Forma Cash from
Operations from
Statement of Cash
Flows................. $(22,713,868)
Addback Pro Forma
Investments in Notes
Receivable............ 42,571,895
------------
Adjusted Pro Forma
Distributions Declared: $ 19,858,027 (s)
============
Pro Forma Wtd. Avg.
Dollars Outstanding.... $913,412,975 (t)
============
Pro Forma Cash
Distributions Declared
per $10,000
Investment............. $ 217 (u)
============
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 21,919,865(a) $55,049,526 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $21,919,865 $64,106,902 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense ...... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 2,889,368(a) 6,931,658 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 2,889,368 12,298,325 11,435,228 7,966,916 25,677,829
Operating
Earnings(Losses) Before
Equity in Earnings of
Joint Ventures/Minority
Interests, Gain on Sale
of Properties,
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)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Other Expenses......... 0 0 0 0 0 0
Provision For Loss on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
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
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $19,030,497 $51,182,905 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Units
Outstanding............ n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,571,079 34,219,298 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 34,757 37,372,684 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Calculation of Pro Forma
Distributions Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows.............
Addback Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable......
Addback Pro Forma
Investments in Notes
Receivable............
Adjusted Pro Forma
Distributions Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL
Pro Forma Combined Income Fund Pro Forma
Adjustments APF XI, Ltd. Adjustments
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental and Earned Income..................... $ 0 $55,049,526 $3,780,720 $ 61,679 (j)
Fees......................................... (32,715,768)(b),(c) 3,226,263 0 (72,158)(k)
Interest and Other Income.................... 207,144 (d) 32,221,925 139,707 0
------------ ----------- ---------- ---------
Total Revenue................................ $(32,508,624) $90,497,714 $3,920,427 $ (10,479)
Expenses:
General and Administrative................... (4,241,719)(e) 15,939,556 191,432 (86,848)(l),(m)
Management and Advisory Fees................. (4,658,434)(f) 0 39,393 (39,393)(n)
Fees to Related Parties...................... (2,161,897)(g) 858,787 0 0
Interest Expense............................. 0 21,498,589 0 0
State Taxes.................................. 0 567,446 24,262 13,509 (o)
Depreciation--Other.......................... 0 199,157 0 0
Depreciation--Property....................... (340,898)(r) 6,590,760 443,936 210,765 (p)
Amortization................................. 2,139,963 (h) 2,303,964 0 0
Transaction Costs............................ 0 157,054 20,888 0
------------ ----------- ---------- ---------
Total Expenses............................... (9,262,985) 48,115,313 719,911 98,033
Operating Earnings(Losses) Before Equity in
Earnings of Joint Ventures/Minority
Interests, Gain on Sale of Properties,
Provision for Losses on Properties and Other
Expenses..................................... $(23,245,639) $42,382,401 $3,200,516 $(108,512)
Equity in Earnings of Joint Venture/Minority
Interest.................................... 0 (14,138) 147,027 (53,515)(q)
Gain on Sale of Properties................... 0 0 461,861 0
Gain on Securitization....................... 0 3,694,351 0 0
Other Expenses............................... 0 0 0 0
Provision For Loss on Properties............. 0 (611,534) 0 0
------------ ----------- ---------- ---------
Net Earnings (Losses) Before
Benefit/(Provision) for Federal Income
Taxes........................................ (23,245,639) 45,451,080 3,809,404 (162,027)
Benefit/(Provision) for Federal Income Taxes 6,898,434 (i) 0 0 0
------------ ----------- ---------- ---------
Net Earnings (Losses)......................... $(16,347,205) $45,451,080 $3,809,404 $(162,027)
============ =========== ========== =========
Earnings Per Share/Unit....................... $ n/a $ n/a $ 0.95 $ n/a
============ =========== ========== =========
Ratio of Earnings to Fixed Charges............ n/a n/a n/a n/a
============ =========== ========== =========
Book Value Per Share/Unit..................... $ n/a $ n/a $ 8.61 $ n/a
============ =========== ========== =========
Dividends Per Share/Unit...................... $ n/a $ n/a $ 0.91 $ n/a
============ =========== ========== =========
Wtd. Avg. Units Outstanding................... n/a n/a 4,000,000 n/a
============ =========== ========== =========
Wtd. Avg. Shares Outstanding.................. 6,150,000 40,369,298 n/a 2,173,248
============ =========== ========== =========
Shares Outstanding............................ 6,150,000 43,522,684 n/a 2,173,248
============ =========== ========== =========
Calculation of Pro Forma Distributions Declared:
Pro Forma Cash from Operations from Statement
of Cashflows................................
Addback Pro Forma Net Cash Proceeds from
Securitization of Notes Receivable..........
Addback Pro Forma Investments in Notes
Receivable..................................
Adjusted Pro Forma Distributions Declared:
Pro Forma Wtd. Avg. Dollars Outstanding.......
Pro Forma Cash Distributions Declared per
$10,000 Investment...........................
<CAPTION>
Adjusted
Pro Forma
----------------
<S> <C>
Revenues:
Rental and Earned Income..................... $ 58,891,925
Fees......................................... 3,154,105
Interest and Other Income.................... 32,361,632
----------------
Total Revenue................................ $ 94,407,662
Expenses:
General and Administrative................... 16,044,140
Management and Advisory Fees................. 0
Fees to Related Parties...................... 858,787
Interest Expense............................. 21,498,589
State Taxes.................................. 605,217
Depreciation--Other.......................... 199,157
Depreciation--Property....................... 7,245,461
Amortization................................. 2,303,964
Transaction Costs............................ 177,942
----------------
Total Expenses............................... 48,933,257
Operating Earnings(Losses) Before Equity in
Earnings of Joint Ventures/Minority
Interests, Gain on Sale of Properties,
Provision for Losses on Properties and Other
Expenses..................................... $ 45,474,405
Equity in Earnings of Joint Venture/Minority
Interest.................................... 79,374
Gain on Sale of Properties................... 461,861
Gain on Securitization....................... 3,694,351
Other Expenses............................... 0
Provision For Loss on Properties............. (611,534)
----------------
Net Earnings (Losses) Before
Benefit/(Provision) for Federal Income
Taxes........................................ 49,098,457
Benefit/(Provision) for Federal Income Taxes 0
----------------
Net Earnings (Losses)......................... $ 49,098,457
================
Earnings Per Share/Unit....................... $ 1.15
================
Ratio of Earnings to Fixed Charges............ 3.23x
================
Book Value Per Share/Unit..................... $ 16.47
================
Dividends Per Share/Unit...................... $ n/a
================
Wtd. Avg. Units Outstanding................... n/a
================
Wtd. Avg. Shares Outstanding.................. 42,542,546 (s)
================
Shares Outstanding............................ 45,695,932
================
Calculation of Pro Forma Distributions Declared:
Pro Forma Cash from Operations from Statement
of Cashflows................................ $ 59,418,695
Addback Pro Forma Net Cash Proceeds from
Securitization of Notes Receivable.......... (265,871,668)
Addback Pro Forma Investments in Notes
Receivable.................................. 288,590,674
----------------
Adjusted Pro Forma Distributions Declared: $ 82,137,691 (t)
================
Pro Forma Wtd. Avg. Dollars Outstanding....... $850,850,914 (u)
================
Pro Forma Cash Distributions Declared per
$10,000 Investment........................... $ 965 (v)
================
</TABLE>
F-26
<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 Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income(loss)........ $ 10,490,297 $ 1,989,688 (a) $ 12,479,985 $ (195,278) $ (73,545) $ (129,428)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation............ 1,548,813 349,465 (b) 1,898,278 39,581 0 0
Amortization expense.... 7,368 0 7,368 0 26,238 424,697
Minority interest in
income of consolidated
joint venture.......... 7,763 0 7,763 0 0 0
Equity in earnings of
joint ventures, net of
distributions.......... 23,234 0 23,234 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................. 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................. 215,797 0 215,797 0 0 (73,166)
Gain on securitization.. 0 0 0 0 0 0
Net cash proceeds from
securitization of notes
receivable............. 0 0 0 0 0 0
Decrease(increase) in
other receivables...... (82,660) 0 (82,660) (377,933) (242,251) (6,771)
Increase in accrued
interest income
included in notes
receivable............. 0 0 0 0 0 0
Decrease(increase) in
accrued interest on
mortgage note
receivable............. 0 0 0 0 0 (449,580)
Investment in notes
receivable............. 0 0 0 0 0 (42,571,895)
Collections on notes
receivable............. 0 0 0 0 0 6,417,907
Increase in restricted
cash................... 0 0 0 0 0 (402,461)
Decrease in due from
related party.......... 0 0 0 0 0 55,382
Decrease(increase) in
prepaid expenses....... 27,548 0 27,548 0 1,811 0
Decrease in net
investment in direct
financing leases....... 787,375 787,375 0 0 0
Increase in accrued
rental income.......... (1,047,421) 0 (1,047,421) 0 0 0
Decrease(increase) in
intangibles and other
assets................. (30,554) 7,942
Increase(decrease) in
accounts payable,
accrued expenses and
other liabilities...... 306,277 0 306,277 (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 0 71,853 25,550 0 0
Decrease in accrued
interest............... 0 0 0 0 0 (362,877)
Increase in rents paid
in advance and
deposits............... 386,365 0 386,365 0 0 0
Increase(decrease) in
deferred rental
income................. 862,647 0 862,647 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Total adjustments...... 3,114,959 349,465 3,464,424 (1,183,414) (344,708) (37,064,802)
------------- ------------ ------------- ----------- --------- ------------
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)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings, direct
financing leases, and
equipment.............. 0 0 0 0 0 0
Additions to land and
buildings on operating
leases................. (77,028,830) (58,749,637)(e) (135,778,467) (31,577) (10,092) 0
Investment in direct
financing leases....... (29,608,346) 0 (29,608,346) 0 0 0
Investment in joint
venture................ (117,662) 0 (117,662) 0 0 0
Acquisition of
businesses.............
Purchase of other
investments............ 0 0 0 0 0 0
Net loss in market value
from investments in
trading securities..... 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income...... 0 0 0 0 0 134,981
Investment in mortgage
notes receivable....... (1,388,463) 0 (1,388,463) 0 0 0
Collections on mortgage
note receivable........ 75,010 0 75,010 0 0 0
Investment in notes
receivable............. (1,087,483) 0 (1,087,483) 0 0 0
Collection on notes
receivable............. 239,596 0 239,596 0 0 0
Decrease in restricted
cash................... 0 0 0 0 0 0
Increase in intangibles
and other assets....... 0 0 0 0 0 0
Investment in
certificates of
deposit................ 0 0 0 0 0 0
Other................... 0 0 0 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Net cash provided
by(used in) investing
activities............ (108,916,178) (58,749,637) (167,665,815) (31,577) (10,092) 134,981
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders...... 210,735 0 210,735 1,288,673 20,572 0
Contributions from
limited partners....... 0 0 0 0 0 0
Contributions from
holder of minority
interest............... 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity... (1,142,237) 0 (1,142,237) 0 0 0
Payment of stock
issuance costs......... (722,001) 0 (722,001) 0 0 0
Proceeds from borrowing
on line of credit/notes
payable................ 36,587,245 33,656,518 (e) 70,243,763 0 0 49,730,934
Payment on line of
credit/notes payable... (12,580,289) 0 (12,580,289) 0 (2,385) (10,291,473)
Retirement of shares of
common stock........... 0 0 0 0 0 0
Distributions to holders
of minority interest... (8,610) 0 (8,610) 0 0 0
Distributions to limited
partners............... 0 0 0 0 0 0
Distributions to
stockholders........... (14,237,405) 0 (14,237,405) 0 0 0
Other................... (200,234) 0 (200,234) 0 0 (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
Cash at beginning of
year................... 123,199,837 0 123,199,837 713,308 962,573 2,526,078
------------- ------------ ------------- ----------- --------- ------------
Cash at end of year..... $ 35,796,119 $(22,753,966) $ 13,042,153 $ 591,712 $ 552,415 $ 4,896,688
============= ============ ============= =========== ========= ============
</TABLE>
F-27
<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>
Combining Historical
Pro Forma CNL Income Pro Forma Adjusted Pro
Adjustments Combined APF Fund XI, Ltd. Adjustments Forma
----------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income(loss)........ $(1,193,185)(a) $ 10,888,549 $ 729,321 $ (49,146)(a) $ 11,568,724
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation............ 0 1,937,859 106,646 52,691 (b) 2,097,196
Amortization expense.... 534,991 (c) 993,294 0 0 993,294
Minority interest in
income of consolidated
joint venture.......... 0 7,763 16,409 0 24,172
Equity in earnings of
joint ventures, net of
distributions.......... 0 23,234 8,918 13,379 (d) 45,531
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................. 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................. 0 142,631 0 0 142,631
Gain on securitization.. 0 0 0 0 0
Net cash proceeds from
securitization of notes
receivable............. 0 0 0 0 0
Decrease(increase) in
other receivables...... 0 (709,615) 106,779 0 (602,836)
Increase in accrued
interest income
included in notes
receivable............. 0 0 0 0 0
Decrease(increase) in
accrued interest on
mortgage note
receivable............. 0 (449,580) 0 0 (449,580)
Investment in notes
receivable............. 0 (42,571,895) 0 0 (42,571,895)
Collections on notes
receivable............. 0 6,417,907 0 0 6,417,907
Increase in restricted
cash................... 0 (402,461) 0 0 (402,461)
Decrease in due from
related party.......... 0 55,382 0 0 55,382
Decrease(increase) in
prepaid expenses....... 0 29,359 (1,119) 0 28,240
Decrease in net
investment in direct
financing leases....... 0 787,375 25,544 0 812,919
Increase in accrued
rental income.......... 0 (1,047,421) (32,773) 0 (1,080,194)
Decrease(increase) in
intangibles and other
assets................. 0 (22,612) 0 0 (22,612)
Increase(decrease) in
accounts payable,
accrued expenses and
other liabilities...... 0 (768,267) 29,653 0 (738,614)
Increase (decrease) in
due to related parties,
excluding reimbursement
of acquisition, and
stock issuance costs
paid on behalf of the
entity................. 0 97,403 (14,048) 0 83,355
Decrease in accrued
interest............... 0 (362,877) 0 0 (362,877)
Increase in rents paid
in advance and
deposits............... 0 386,365 (1,162) 0 385,203
Increase(decrease) in
deferred rental
income................. 0 862,647 0 0 862,647
----------- ------------- ----------- ----------- -------------
Total adjustments...... 534,991 (34,593,509) 244,847 66,070 (34,282,592)
----------- ------------- ----------- ----------- -------------
Net cash provided
by(used in) operating
activities............ (658,194) (23,704,960) 974,168 16,924 (22,713,868)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings, direct
financing leases, and
equipment.............. 0 0 0 0 0
Additions to land and
buildings on operating
leases................. (135,820,136) (337,806) (136,157,942)
Investment in direct
financing leases....... 0 (29,608,346) (694,610) 0 (30,302,956)
Investment in joint
venture................ 0 (117,662) (247,286) 0 (364,948)
Acquisition of
businesses............. (7,885,789)(f) (7,885,789) 0 (2,817,211)(g) (11,180,000)
0 (477,000)(g)
Purchase of other
investments............ 0 0 0 0 0
Net loss in market value
from investments in
trading securities..... 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income...... 0 134,981 0 0 134,981
Investment in mortgage
notes receivable....... 0 (1,388,463) 0 0 (1,388,463)
Collections on mortgage
note receivable........ 0 75,010 0 0 75,010
Investment in notes
receivable............. 0 (1,087,483) 0 0 (1,087,483)
Collection on notes
receivable............. 0 239,596 0 0 239,596
Decrease in restricted
cash................... 0 0 1,630,296 0 1,630,296
Increase in intangibles
and other assets....... 0 0 0 0 0
Investment in
certificates of
deposit................ 0 0 0 0 0
Other................... 0 0 0 0 0
----------- ------------- ----------- ----------- -------------
Net cash provided
by(used in) investing
activities............ (7,885,789) (175,458,292) 350,594 (3,294,211) (178,401,909)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders...... 0 1,519,980 0 0 1,519,980
Contributions from
limited partners....... 0 0 0 0 0
Contributions from
holder of minority
interest............... 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity... 0 (1,142,237) 0 0 (1,142,237)
Payment of stock
issuance costs......... 0 (722,001) 0 0 (722,001)
Proceeds from borrowing
on line of credit/notes
payable................ 0 119,974,697 0 0 119,974,697
Payment on line of
credit/notes payable... 0 (22,874,147) 0 0 (22,874,147)
Retirement of shares of
common stock........... 0 0 0 0 0
Distributions to holders
of minority interest... 0 (8,610) (16,366) 0 (24,976)
Distributions to limited
partners............... 0 0 (995,006) 0 (995,006)
Distributions to
stockholders........... 0 (14,237,405) 0 0 (14,237,405)
Other................... 0 (209,836) 0 0 (209,836)
----------- ------------- ----------- ----------- -------------
Net cash provided
by(used in) financing
activities............ 0 82,300,441 (1,011,372) 0 81,289,069
Net increase in cash.... (8,543,983) (116,862,811) 313,390 (3,277,287) (119,826,708)
Cash at beginning of
year................... 0 127,401,796 1,559,240 0 128,961,036
----------- ------------- ----------- ----------- -------------
Cash at end of year..... $(8,543,983) $ 10,538,985 $ 1,872,630 $(3,277,287) $ 9,134,328
=========== ============= =========== =========== =============
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------ ----------- ------------ ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income(loss)........ $ 32,152,408 $19,030,497 (a) $ 51,182,905 $10,656,379 $(468,133) $ 427,134
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 4,042,290 2,889,368 (b) 6,931,658 119,923 79,234 0
Amortization expense... 11,808 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
leases................ 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) (2,187,652) 0 0 0
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 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 693,372 0 0 0
------------ ----------- ------------ ----------- ---------- ------------
Total adjustments...... 6,963,867 2,889,368 9,853,235 (3,608,563) 316,963 1,610,591
------------ ----------- ------------ ----------- ---------- ------------
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
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings, direct
financing leases, and
equipment.............. 2,385,941 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................. (200,101,667) (58,749,637)(e) (258,851,304) (381,671) (236,372) 0
Investment in direct
financing leases....... (47,115,435) (47,115,435) 0 0 0
Investment in joint
venture................ (974,696) (974,696) 0 0 0
Acquisition of
businesses.............
Purchase of other
investments............ (16,083,055) (16,083,055) 0 0 0
Net loss in market value
from investments in
trading securities..... 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income...... 0 0 0 0 212,821
Investment in mortgage
notes receivable....... (2,886,648) (2,886,648) 0 0 0
Collections on mortgage
note receivable........ 291,990 291,990 0 0 0
Investment in equipment
notes receivable....... (7,837,750) (7,837,750) 0 0 0
Collections on equipment
notes receivable....... 1,263,633 1,263,633 1,783,240 0 0
Decrease in restricted
cash................... 0 0 0 0 0
Increase in intangibles
and other assets....... (6,281,069) (6,281,069) 0 0 0
Other................... 0 0 200,000 0 0
------------ ----------- ------------ ----------- ---------- ------------
Net cash provided by
(used in) investing
activities............ (277,338,756) (58,749,637) (336,088,393) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders...... 385,523,966 385,523,966 966,115 51,830 50,100
Contributions from
limited partners....... 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity... (4,574,925) (4,574,925) 0 0 0
Payment of stock
issuance costs......... (34,579,650) (34,579,650) 0 0 0
Proceeds from borrowing
on line of credit/notes
payable................ 7,692,040 33,656,518 (e) 41,348,558 198,296 0 413,555,624
Payment on line of
credit/notes payable... (8,039) (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock........... (639,528) (639,528) 0 0 0
Distributions to holders
of minority interest... (34,073) (34,073) 0 0 0
Distributions to limited
partners............... 0 0 0 0 0
Distributions to
stockholders........... (39,449,149) (39,449,149) (9,364,488) 0 0
Other................... (95,101) (95,101) 0 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
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
============ =========== ============ =========== ========== ============
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma CNL Income Pro Forma Adjusted Pro
Adjustments Combined APF Fund XI, Ltd. Adjustments Forma
------------ ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(16,347,205)(a) $ 45,451,080 $3,809,404 $ (162,027)(a) $ 49,098,457
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... (340,898)(b) 6,789,917 443,936 210,765 (b) 7,444,618
Amortization expense... 2,139,963 (c) 4,454,047 0 4,454,047
Minority interest in
income of consolidated
joint venture......... 30,156 68,474 98,630
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 47,342 53,515 (d) 85,417
Loss (gain) on sale of
land, building, net
investment in direct
leases................ 0 (461,861) (461,861)
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 1,009,576 0 1,009,576
Gain on
securitization........ (3,356,538) 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 265,871,668 0 265,871,668
Decrease (increase) in
other receivables..... (2,543,413) (23,376) (2,566,789)
Increase in accrued
interest income
included in notes
receivable............ (170,492) 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0
Investment in notes
receivable............ (288,590,674) 0 (288,590,674)
Collections on notes
receivable............ 23,539,641 0 23,539,641
Decrease in restricted
cash.................. 2,504,091 0 2,504,091
Decrease (increase) in
due from related
party................. (953,688) 0 (953,688)
Increase in prepaid
expenses.............. 7,246 1,028 8,274
Decrease in net
investment in direct
financing leases...... 1,971,634 90,236 2,061,870
Increase in accrued
rental income......... (2,187,652) (127,336) (2,314,988)
Increase in intangibles
and other assets...... (154,351) 0 (154,351)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 846,680 3,681 850,361
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. (133,364) 18,798 (114,566)
Increase in accrued
interest.............. (77,968) 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 23,736 460,579
Decrease in deferred
rental income......... 693,372 0 693,372
------------ ------------ ---------- ----------- ------------
Total adjustments...... 1,799,065 9,971,291 84,658 264,280 10,320,229
------------ ------------ ---------- ----------- ------------
Net cash provided by
(used in) operating
activities............ (14,548,140) 55,422,371 3,894,062 102,253 59,418,686
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings, direct
financing leases, and
equipment.............. 2,385,941 1,630,296 4,016,237
Additions to land and
buildings on operating
leases................. (259,469,347) 0 (259,469,347)
Investment in direct
financing leases....... (47,115,435) 0 (47,115,435)
Investment in joint
venture................ (974,696) (1,169) (975,865)
Acquisition of
businesses............. (7,885,789)(f) (7,885,789) 0 (2,817,211)(g) (11,180,000)
0 (477,000)(g)
Purchase of other
investments............ (16,083,055) 0 (16,083,055)
Net loss in market value
from investments in
trading securities..... 295,514 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income...... 212,821 0 212,821
Investment in mortgage
notes receivable....... (2,886,648) 0 (2,886,648)
Collections on mortgage
note receivable........ 291,990 0 291,990
Investment in equipment
notes receivable....... (7,837,750) 0 (7,837,750)
Collections on equipment
notes receivable....... 3,046,873 0 3,046,873
Decrease in restricted
cash................... 0 (1,630,296) (1,630,296)
Increase in intangibles
and other assets....... (6,281,069) 0 (6,281,069)
Other................... 200,000 0 200,000
------------ ------------ ---------- ----------- ------------
Net cash provided by
(used in) investing
activities............ (7,885,789) (342,100,650) (1,169) (3,294,211) (345,396,030)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders...... 386,592,011 0 386,592,011
Contributions from
limited partners....... 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity... (4,574,925) 0 (4,574,925)
Payment of stock
issuance costs......... (34,579,650) 0 (34,579,650)
Proceeds from borrowing
on line of credit/notes
payable................ 455,102,478 0 455,102,478
Payment on line of
credit/notes payable... (411,813,826) 0 (411,813,826)
Retirement of shares of
common stock........... (639,528) 0 (639,528)
Distributions to holders
of minority interest... (34,073) (66,015) (100,088)
Distributions to limited
partners............... 0 (3,540,024) (3,540,024)
Distributions to
stockholders........... (48,813,637) 0 (48,813,637)
Other................... (2,595,088) 0 (2,595,088)
------------ ------------ ---------- ----------- ------------
Net cash provided by
(used in) financing
activities............ 0 338,643,762 (3,606,039) 0 335,037,723
Net increase (decrease)
in cash................ (22,433,929) 51,965,483 286,854 (3,191,958) 49,060,379
Cash at beginning of
year................... 49,829,130 1,272,386 51,101,516
------------ ------------ ---------- ----------- ------------
Cash at end of year..... (22,433,929) 101,794,613 $1,559,240 $(3,191,958) $100,161,895
============ ============ ========== =========== ============
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of 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 Income Fund. This unaudited pro forma financial
information has been prepared utilizing the historical financial statements of
APF and the historical combined financial information of the Advisor, CNL
Restaurant Financial Services Group and the Income Fund and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, the Advisor the CNL Restaurant Financial Services Group and the Income
Fund. The Pro Forma Balance Sheet was prepared as if the transactions described
above occurred on 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 Fund 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 Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
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
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
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.
(B) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Shares Offered.......... 3,800,000 2,350,000 2,173,247.75 8,323,247.75
Exchange Value.......... $ 20 $ 20 $ 20 $ 20
----------- ----------- ------------ ------------
Share Consideration..... $76,000,000 $47,000,000 $ 43,464,955 $166,464,955
Cash Consideration...... -- -- 477,000 477,000
APF Transaction Costs... 4,872,520 3,013,269 2,817,211 10,703,000
----------- ----------- ------------ ------------
Total Purchase
Price.............. $80,872,520 $50,013,269 $ 46,759,166 $177,644,955
=========== =========== ============ ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 7,141,252 $10,006,878 $ 34,311,927 $ 51,460,057
Purchase Price
Adjustments:
Land and buildings on
operating leases..... 9,958,646 9,958,646
Net investment in
direct financing
leases............... 2,540,926 2,540,926
Investment in joint
ventures............. 1,760,980 1,760,980
Accrued rental
income............... (1,677,835) (1,677,835)
Intangibles and other
assets............... (2,792,876) (135,478) (2,928,354)
Goodwill*............. 42,799,267 -- 42,799,267
Excess purchase
price................ 73,731,268 -- -- 73,731,268
----------- ----------- ------------ ------------
Total Allocation.... $80,872,520 $50,013,269 $ 46,759,166 $177,644,955
=========== =========== ============ ============
</TABLE>
--------
* Goodwill represents the portion of the purchase price which is assumed
to relate to the ongoing value of the debt business.
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $10,703,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of
the Advisor, CNL Financial Services Group and the Income Fund. The
excess purchase price paid for the Advisor to a related party of
$73,731,268 was expensed at March 31, 1999 because the Advisor has not
been deemed to qualify as a "business" for purposes of applying APB
Opinion No. 16, "Business Combinations". Goodwill of $42,799,267
relating to the acquisition of the CNL Financial Services Group is
being amortized over 20 years. APF did not acquire any intangibles as
part of any of the acquisitions. The entries were as follows:
<TABLE>
<C> <S> <C> <C>
1. Common Stock (CFA, CFS, CFC)--Class A........ 8,600
Common Stock (CFA, CFS, CFC)--Class B........ 4,825
APIC (CFA, CFS, CFC)......................... 13,857,645
Retained Earnings............................ 3,277,060
Accumulated distributions in excess of
earnings.................................... 73,731,268
Goodwill for CFC (Intangibles and other
assets)..................................... 42,799,267
CFC/CFS Org Costs/Other Assets.............. 2,792,876
Cash to pay APF transaction costs............ 7,885,789
APF Common Stock............................. 61,500
APF APIC..................................... 122,938,500
(To record acquisition of CFA, CFS and CFC)
2. Partners Capital............................. 34,311,927
Land and buildings on operating leases....... 9,958,646
Net investment in direct financing leases.... 2,540,926
Investment in joint ventures................. 1,760,980
Accrued rental income........................ 1,677,835
Intangibles and other assets................. 135,478
Cash to pay APF Transaction costs............ 2,817,211
Cash consideration to Income Fund............ 477,000
APF Common Stock............................ 21,732
APF APIC.................................... 43,443,223
(To record acquisition of Income Fund)
</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 Income Fund of $11,398 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, 1999.
(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
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
made for any properties for the periods prior to their construction
completion and availability for occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................... $ (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 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
</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>
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $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)
<TABLE>
<S> <C>
Amortization of goodwill....................................... $534,991
</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 $15,420 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the Income Fund as if the leases had been
acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<S> <C>
Management fees............................................... $ (9,476)
Reimbursement of administrative costs......................... (14,755)
--------
$(24,231)
========
</TABLE>
(l) Represents the elimination of $14,755 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $10,465 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 $9,476 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $8,961 resulting from
assuming that acquisitions of properties that had been operational when
APF acquired them from January 1, 1999 through May 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 Fund 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 $52,691 as a result
of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated using
the straight-line method over the remaining useful lives of the
properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $13,379
as a result of adjusting the historical basis of the real estate owned
by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings owned indirectly by the
Income Fund is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(r) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1999 were assumed to have been
issued and outstanding as of January 1, 1999. For
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
purposes of the pro forma financial statements, it is assumed that the
stockholders approved a proposal for a one-for-two reverse stock split
and a proposal to increase the number of authorized common shares of APF
on January 1, 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.
(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.
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates.......................... $ (1,773,406)
Secured equipment lease fees.............................. (54,998)
Advisory fees............................................. (305,030)
Reimbursement of administrative costs..................... (408,762)
Acquisition fees.......................................... (21,794,386)
Underwriting fees......................................... (388,491)
Administrative, executive and guarantee fees.............. (1,233,043)
Servicing fees............................................ (1,570,331)
Development fees.......................................... (229,153)
Management fees........................................... (1,851,004)
------------
Total................................................... $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these entities
on a combined basis, these loan origination fees are required to be
deferred and amortized into revenues over the term of the loans
originated in accordance with generally accepted accounting principles.
Total loan origination fees received by CNL Financial Services, Inc.
during the year ended December 31, 1998 of $3,107,164 are being
deferred for pro forma purposes and are being amortized over the terms
of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the year ended
December 31, 1998, which were deferred for pro forma purposes as
described in 5(II)(c). These deferred loan origination fees are being
amortized and recorded as interest income over the terms of the
underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF to
the Advisor, and ii) the capitalization of incremental costs associated
with the acquisition, development and leasing of properties acquired
during the period as if costs relating to properties developed by APF
were subject to capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs........................... $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,851,004)
Administrative executive and guarantee fees................ (1,233,043)
Servicing fees............................................. (1,269,357)
Advisory fees.............................................. (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(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.
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to
in footnote (4)
<TABLE>
<S> <C>
Amortization of goodwill..................................... $2,139,963
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure
that exists within APF. APF expects to continue to qualify as a REIT
and does not expect to incur federal income taxes.
(j) Represents $61,679 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the Income Fund as if the leases had been
acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<S> <C>
Management fees............................................... $(39,393)
Reimbursement of administrative costs......................... (32,765)
--------
$(72,158)
========
</TABLE>
(l) Represents the elimination of $32,765 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $54,083 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports
for one combined entity instead of individual entities.
(n) Represents the elimination of $39,393 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $13,509 resulting from
assuming that acquisitions of properties that had been operational when
APF acquired them from January 1, 1998 through 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 Fund had been issued as of January 1, 1998 and that
these entities had operated under a REIT structure as of January 1,
1998.
(p) Represents an increase in depreciation expense of $210,765 as a result
of adjusting the historical basis of the real estate owned indirectly
by the Fund through joint venture or tenancy in common arrangements
with affiliates or unrelated third parties, to fair value as a result
by the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated using
the straight-line method over the remaining useful lives of the
properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $53,515
as a result of adjusting the historical basis of the real estate owned
by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings owned indirectly by the
Income Fund is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a result
of eliminating acquisition fees (see 4(II)(b)) between APF and the
Advisor which on a historical basis were capitalized as part of the
basis of the building.
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(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 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.
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non-Cash Investing Activities
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net income.
(c) Represents add back of pro forma amortization of goodwill expenses to
net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the use of amounts borrowed under APF's credit facility and
the use of cash to 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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
F-40
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund XI, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund XI, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
A-1
<PAGE>
(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
A-2
<PAGE>
Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker, Incorporated
----------------------------------------
Legg Mason Wood Walker, Incorporated
A-3
<PAGE>
Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among CNL American Properties Fund, Inc., a
Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware limited
partnership (the "Operating Partnership"), CNL APF GP Corp., a Delaware
corporation (the "OP General Partner"), CNL Income Fund XI, Ltd., a Florida
limited partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr.,
and CNL Realty Corporation, a Florida corporation (together with Messrs. Bourne
and Seneff, the "General Partners"). APF, the Operating Partnership, the OP
General Partner, the Fund and the General Partners are referred to collectively
herein as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund will
be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. AMENDMENTS TO MERGER AGREEMENT
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against
the Merger and affirmatively elect the note option, such limited partners
shall be entitled to receive, in lieu of the Share Consideration, notes
(the "Notes") in the aggregate amount equal to 97% of the value (based on
the Exchange Value as defined in the Registration Statement) of the Share
Consideration such Dissenting Partners would have otherwise received had
such partners not elected to receive the Notes (the "Note Option"). The
Notes will mature on the fifth anniversary of the Closing Date and will
bear interest at a fixed rate equal to seven percent. The aggregate Share
Consideration shall be reduced on a one-for-basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners
not elected the Note Option."
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
B-1
<PAGE>
1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to Dissenting
Limited Partners shall not have exceeded 15% of the value of the Share
Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. GENERAL
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each of
which shall be deemed an original but all of which together will constitute
one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any choice or
conflict of law provision or rules (whether of the State of Florida or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
By: ____________________________
James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
By: ____________________________
Robert A. Bourne
Its: President
CNL APF GP CORP.
/s/ Robert A. Bourne
By: ____________________________
Robert A. Bourne
Its: President
CNL INCOME FUND IX, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
By: ____________________________
James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
By: ____________________________
James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
_________________________________
Robert A. Bourne, as General
Partner
/s/ James M. Seneff, Jr.
_________________________________
James M. Seneff, Jr., as General
Partner
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<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund XI, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
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"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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<PAGE>
"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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<PAGE>
"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
B-7
<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 4,394,196 fully paid and nonassessable APF Common
Shares (2,197,098 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $40,255,527, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 56,605,804 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to execute and
deliver this Agreement and to perform their obligations hereunder. The
execution, delivery and
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<PAGE>
performance by APF, the OP General Partner and the Operating Partnership of
this Agreement have been duly and validly authorized by the boards of directors
of APF and the OP General Partner. This Agreement constitutes the valid and
legally binding obligation of APF, the OP General Partner and the Operating
Partnership, enforceable in accordance with its terms and conditions. None of
APF, the OP General Partner or the Operating Partnership needs to give any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order to consummate the
transactions contemplated by this Agreement, except in connection with federal
securities laws and any applicable "Blue Sky" or state securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions the validity of this
Agreement or any action to be taken by APF in connection with the consummation
of the
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transactions contemplated hereby or could otherwise prevent or delay the
consummation of the transactions contemplated by this Agreement. Except as
publicly disclosed by APF in any APF SEC Document, none of APF or its
Subsidiaries is subject to any outstanding order, writ, injunction or decree
which, insofar as can be reasonably foreseen in the future, could reasonably be
expected to have a Material Adverse Effect on APF or would prevent or delay the
consummation of the transactions contemplated hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material
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<PAGE>
terms of its permits, except where the failure so to comply could not
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF, the businesses of APF and its Subsidiaries are not,
to APF's Knowledge, being conducted in violation of any law, ordinance or
regulation of any governmental entity except that no representation or warranty
is made in this Section 6.14 with respect to environmental laws and except for
violations or possible violations which do not, and, insofar as reasonably can
be foreseen, in the future will not, have a Material Adverse Effect on APF.
Except as publicly disclosed by APF in its APF SEC Documents, no investigation
or review by any governmental entity with respect to APF or its Subsidiaries is
pending or, to the Knowledge of APF, threatened, nor, to the Knowledge of APF,
has any government entity indicated an intention to conduct the same, other
than, in each case, those which APF reasonably believes will not have a
Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 4,000,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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<PAGE>
will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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<PAGE>
(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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<PAGE>
from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such leases and subleases (as amended to date). With respect to
each lease and sublease listed in Section 7.12(b) of the Disclosure Schedule:
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(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General Partners have
made available to APF and the Operating Partnership correct and complete copies
of all such licenses, sublicenses, agreements, and permissions (as amended to
date).
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(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $4,394,196 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $439,420 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
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 XI, 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
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Appendix C
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF LIMITED PARTNERSHIP
OF
CNL INCOME FUND XI, LTD.
- --------------------------------------------------------------------------------
(Insert name currently on file with Florida Dept. of State)
Pursuant to the provisions of section 620.109, Florida Statutes, this Florida
limited partnership, whose certificate was filed with the Florida Department of
State on August 20, 1991, adopts the following certificate of amendment to its
certificate of limited partnership:
FIRST: Amendment(s): (indicate article number(s) being amended, added, or
deleted)
Article XX, Section 21.5 is deleted in its entirety, and all cross references
to such section are deleted in their entirety.
SECOND: This certificate of amendment shall be effective at the time of its
filing with the Florida Department of State.
THIRD: Signature(s)
Signature of current general partner(s):
-------------------------------------
James M. Seneff, Jr.
-------------------------------------
Robert A. Bourne
CNL REALTY CORPORATION
By: _________________________________
Name:
Signature(s) of new general partner(s), if applicable: N/A
C-1
<PAGE>
Appendix D
[FORM OF OPINION]
, 1999
James M. Seneff, Jr.
Robert A. Bourne
400 East South Street
Orlando, Florida 32801
Gentlemen:
We have acted as counsel to CNL Income Fund XI, Ltd., a Florida limited
partnership (the "Partnership") of which you are the general partners (the
"General Partners"), in connection with the proposed amendment (the "Proposed
Amendment") to the Amended and Restated Agreement of Limited Partnership of CNL
Income Fund XI, Ltd. (the "Partnership Agreement"). The Partnership Agreement
requires that in connection with any proposed amendment to the Partnership
Agreement (other than ministerial amendments and those amendments dealing with
the transfer of a limited partner's partnership interest or the admission of
substituted or additional limited partners), the General Partners must obtain
an opinion of counsel concerning whether such proposed amendment would result
in changing the Partnership to a general partnership. The Proposed Amendment
would delete the provision in the Partnership Agreement that prohibits the
Partnership from participating in any transaction involving (i) the
acquisition, merger, conversion, or consolidation, either directly or
indirectly, of the Partnership, and (ii) the issuance of securities of any
other partnership, real estate investment trust, corporation trust or other
entity that would be created or would survive after the successful completion
of such transaction.
This opinion is furnished pursuant to the Partnership Agreement. In
rendering our opinion, we have examined and relied on the Partnership
Agreement, the Proposed Amendment, and the Certificate of Limited Partnership
of the Partnership. We have, in addition, made such other inquiries of fact and
examinations of law as we have deemed necessary for purposes of rendering this
opinion.
We are members of the Bar of the State of Florida and do not hold ourselves
out as being conversant with the laws of any jurisdiction other than those of
the State of Florida and are expressing no opinion as to the laws of any
jurisdiction other than those of the State of Florida and our opinion is so
limited.
In rendering the opinion set forth below, we have assumed: the genuineness
of all signatures on records, certificates, instruments, agreements and other
documents submitted to us for examination; the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, photostatic, facsimile, reproduced, or
conformed copies and the authenticity of the originals of such latter
documents; the accuracy and completeness of all factual representations made in
the above-referenced documents; and the legal capacity of all natural persons.
Based upon the foregoing and subject to the limitations and qualifications
hereinafter set forth, we are of the opinion that the Proposed Amendment to the
Partnership Agreement would not result in changing the Partnership to a general
partnership.
This opinion letter is based upon and limited to laws of the State of
Florida as in effect on the date of this letter and to our current knowledge of
facts in existence as of the date of this letter and material to the opinions
expressed in this letter. This opinion letter is rendered as of the date
hereof, and does not purport to analyze, evaluate or consider the legal effect
of any event, legal or factual, occurring after such date that may alter the
validity, effect or contents of this opinion, and we assume no obligation to
update the opinion set forth herein.
<PAGE>
This opinion letter is limited to the matters expressly set forth in this
letter, and no other statement or opinions should be inferred beyond the
matters expressly stated.
Except as agreed by us in writing, our opinion is solely for the benefit of
the addressees shown on the first page hereof and the limited partners of the
Partnership and may be relied upon by such parties solely for the purposes for
which it is being furnished. Without our prior written consent, this opinion
letter may not be used, circulated, quoted or otherwise referred to for any
purpose except as stated herein.
Very truly yours,
Baker & Hostetler LLP
<PAGE>
CNL AMERICAN PROPERTIES, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND XII, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund XII, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly-owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999 and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties on a triple-net
basis, APF has the ability to offer a complete range of restaurant property
services to operators of national and regional restaurant chains, from triple-
net leasing and mortgage financing to site selection, construction management
and build-to-suit development. If APF acquires all of the Income Funds in the
Acquisition, APF expects to have total assets of approximately $1.5 billion at
the time of the consummation of the Acquisition and will be one of the largest
triple-net lease REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 2,384,248 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is uncertain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for
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trading on the NYSE. We do not know the value at which an APF Share will trade
on the NYSE upon listing. It is possible that the APF Shares will trade at
prices substantially below the exchange value. APF has, however, recently sold
$750 million of APF Shares through three public offerings. In each offering,
the offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At March 31, 1999, APF has invested all of the net offering proceeds to acquire
restaurant properties, to make mortgage loans and to pay fees and other
expenses.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the Acquisition?
There are a number of material risks and considerations that you should
consider, including:
. We are uncertain as to the value at which APF Shares will trade
following listing.
. We have material conflicts in light of our being both general partners
of the Income Funds and members of APF's Board of Directors.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. As stated below, the Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote against the
Acquisition.
Did you receive a fairness opinion in connection with APF's acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
with respect to the fairness, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the colored
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's acquisition of your
Income Fund. If you prefer you may instead vote by telephone, following the
instructions on your consent form. If you sign and send in your consent form
and do not indicate how you want to vote, your consent form will be counted as
a vote "For" the Acquisition. If you do not vote or you abstain from voting, it
will count as a vote "Against" the Acquisition.
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In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2004 in an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only receive the notes if you vote "Against" the
Acquisition, and you elect to receive the notes on your consent form. You will
receive APF Shares if your Income Fund elects to be acquired in the Acquisition
and you vote "For" the Acquisition, or you vote "Against" the Acquisition and
do not affirmatively select the notes option on your consent form. In addition,
if Limited Partners in your Income Fund elect to receive notes in the amount
greater than 15% of the estimated value of APF Shares, based on the exchange
value, to be paid to your Income Fund, then APF has the right to decline to
acquire your Income Fund. The notes will not be listed on any exchange or
automated quotation system, and a market for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRA, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
the tax that you must pay will generally be based on the difference between the
value of the APF Shares you receive and the tax basis of your units. If you
elect to receive notes, your tax will be based upon your allocable share of the
gain which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Some of
the gain may be subject to the 25% rate of tax applicable to certain types of
real property gain.
We urge you to consult with your tax advisor to evaluate the taxes that will be
incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $1,650. To
review the tax consequences to the Limited Partners of the Income Funds in
greater detail, see pages 180 through 194 of the consent solicitation and
"Federal Income Tax Considerations" in this supplement.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds acquired by
APF may be differently constructed, located in a different geographic area or
of a different restaurant chain than the restaurant properties owned by your
Income Fund. Because the market for real estate may vary from one region of the
country to another, the change in geographic diversity may expose you to
different and greater risks than those to which you are presently exposed. For
geographic information regarding APF's and the Income Funds' restaurant
properties, see "APF's Business and The Restaurant Properties -- Business
Objectives and Strategies" and "-- The Restaurant Properties -- General" and
"Business of the Income Funds -- Description of Restaurant Properties" in the
consent solicitation.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund. This description is qualified in its entirety
by the more detailed discussion in the section entitled "Risk Factors"
contained in the consent solicitation.
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Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease below the exchange value upon listing.
Your Income Fund will be receiving 2,384,248 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices substantially below
the exchange value or the historical per share book value of the assets of APF.
The APF Shares have been approved for listing on the NYSE, subject to official
notice of issuance. Prior to listing, the existing APF stockholders have not
had an active trading market in which they could sell their APF Shares.
Additionally, any Limited Partners of the Income Funds who become APF
stockholders as a result of the Acquisition, will have transformed their
investment in non-tradable units into an investment in freely tradable APF
Shares. Consequently, some of these stockholders may choose to sell their APF
Shares upon listing at a time when demand for APF Shares may be relatively low.
The market price of the APF Shares may be volatile after the Acquisition, and
the APF Shares could trade at prices substantially less than the exchange value
as a result of increased selling activity following the issuance of the APF
Shares, the interest level of investors in purchasing the APF Shares after the
Acquisition and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund made $850, $850 and $880, respectively, in distributions per $10,000
investment to you. While historically, APF has made distributions equal to
7.625% per APF Share, based on the exchange value, we cannot be sure that APF
will be able to maintain this level of distributions in the future. In the
event that APF is unable to maintain this level of distributions in the future,
your distributions per $10,000 investment may decrease substantially after the
Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have three material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne have a different interest in the completion of the Acquisition which
may conflict with your interest as a Limited Partner of the Income Fund or with
their own positions as the general partners of your Income Fund. Second,
assuming only your Income Fund is acquired in the Acquisition, we will receive
17,855 APF Shares. Finally, in the event that your Income Fund is not acquired,
however, we, as general partners of your Income Fund, may be required to pay
all or a substantial portion of the Acquisition costs allocated to your Income
Fund to the extent that you or other Limited Partners of your Income Fund vote
against the Acquisition. For additional information regarding the Acquisition
costs allocated to your Income Fund, see "Comparison of Alternative Effect on
Financial Condition and Results of Operations" contained in this supplement.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own and lease on a triple-net basis, on the date
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that the Acquisition is consummated, assuming only your Income Fund was
acquired as of March 31, 1999, 561 restaurant properties. The risks inherent in
investing in an operating company such as APF include that APF may invest in
new restaurant properties that are not as profitable as APF anticipated, may
incur substantial indebtedness to make future acquisitions of restaurant
properties which it may be unable to repay and may make mortgage loans to
prospective operators of national and regional restaurant chains which may not
have the ability to repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through sale of your APF Shares, not from
liquidation proceeds, if any, from restaurant properties. Continuation of your
Income Fund would, on the other hand, permit you eventually to receive
liquidation proceeds from the sale of the Income Fund's restaurant properties,
and your share of these sale proceeds could be higher than the amount realized
from the sale of your APF Shares or from the payments on any notes if you elect
to receive the notes.
Real Estate/Business Risks
If APF's borrower's default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default 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. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
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APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
March 31, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.62x and its ratio of debt-to-total assets was
28.01%. If only your Income Fund is acquired as of that date, APF's debt
service ratio would have been 3.81x and its ratio of debt-to-total assets would
have been 26.78%. Up through the time immediately prior to the consummation of
the Acquisition, as a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former Limited Partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgages. APF
typically does not require that a third party guarantee the obligations of the
tenant or the borrower. The ability of the tenants or borrowers to pay their
obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to: (1)
national, regional and local
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economic conditions which may be adversely affected by industry slowdowns,
employer relocations, prevailing employment conditions and other factors, and
which may reduce consumer demand for the products offered by APF's customers;
(2) local real estate conditions; (3) changes or weaknesses in specific
industry segments; (4) perceptions by prospective customers of the safety,
convenience, services and attractiveness of the restaurant chain; (5) changes
in demographics, consumer tastes and traffic patterns; (6) the ability to
obtain and retain capable management; (7) changes in laws, building codes,
similar ordinances and other legal requirements, including laws increasing the
potential liability for environmental conditions existing on properties; (8)
the inability of a particular restaurant chain's computer system, or that of
its franchisor or vendors, to adequately address Year 2000 issues; (9)
increases in operating expenses; and (10) increases in minimum wages, taxes,
including income, service, real estate and other taxes, or mandatory employee
benefits.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as a stockholder, would be reduced substantially for
each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to certain adjustments that are unique to REITs, a REIT generally
must distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
For a more detailed discussion of the risks associated with the Acquisition,
see "Risk Factors" in the consent solicitation.
CONSIDERATION PAID TO INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
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The following table sets forth information regarding the estimated value of
the consideration that your Income Fund will receive in the Acquisition. The
APF Shares payable to your Income Fund will not change if APF acquires fewer
than all of the Income Funds in the Acquisition. This data assumes that none of
the Limited Partners of your Income Fund have elected to receive notes. You
should note that the APF Shares may trade at prices substantially below the
exchange value upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited Estimated
Partner Value of
Original Investments APF Shares
Limited Less Any per
Partner Distributions Estimated Average
Investments of Net Sales Estimated Value of $10,000
Less Any Proceeds per Number of Value of APF Shares Original
Distributions $10,000 APF Shares APF Shares Estimated after Limited
of Net Sales Original Offered to Payable to Acquisition Acquisition Partner
Proceeds Investment(1) Income Fund Income Fund Expenses Expenses Investment
- ------------- ------------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
$45,000,000 $10,000 2,384,248 $47,684,960 $518,000 $47,166,960 $10,402
</TABLE>
- --------
(1) Income fund has made no distributions of net sales proceeds.
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2004. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2004. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest. For more detailed information, see "The Acquisition" and
"Description of the Notes" in the consent solicitation.
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees (1) ..................................................... $27,233
Appraisals and Valuation (2)........................................ 7,920
Fairness Opinions (3)............................................... 30,000
Solicitation Fees (4)............................................... 18,900
Printing and Mailing (5)............................................ 123,285
Accounting and Other Fees (6)....................................... 60,193
-------
Subtotal....................................................... 267,531
</TABLE>
S-8
<PAGE>
Closing Transaction Costs
<TABLE>
<S> <C>
Title, Transfer Tax, and Recording Fees(7).......................... $114,935
Legal Closing Fees(8)............................................... 56,772
Partnership Liquidation Costs(9).................................... 78,762
--------
Subtotal....................................................... 250,469
--------
Total............................................................... $518,000
========
</TABLE>
--------
(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $312,063. Your
Income Fund's pro-rata portion of these fees was determined based on
the percentage of the value of the APF Share consideration payable to
your Income Fund, based on the exchange value, to the total value of
the APF Share consideration payable to all of the Income Funds, based
on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the
Income Funds in connection with the Acquisition were $105,420. Your
Income Fund's pro-rata portion of these fees was determined based on
number of restaurant properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and
incurred a fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $249,626. Your
Income Fund's pro-rata portion of these fees was determined based on
the number of Limited Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the Income Funds
in connection with the Acquisition is estimated to be $1,610,399. Your
Income Fund's pro-rata portion of these fees was determined based on
the number of Limited Partners in your Income Fund.
(6) Aggregate accounting and other fees to be incurred by the Income Funds
in connection with the Acquisition is estimated to be $683,904. Your
Income Fund's pro-rata portion of these fees was determined based on
the percentage of your Income Fund's total assets as of March 31, 1999
to the total assets of all of the Income Funds as of March 31, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by all
of the Income Funds in connection with the Acquisition is estimated to
be $1,312,808. Your Income Fund's pro-rata portion of these fees was
determined based on the percentage of the value of the APF Share
consideration payable to your Income Fund, based on the exchange value,
to the total value of the APF Share consideration payable to all of the
Income Funds, based on the exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,454. Your
Income Fund's pro-rata portion of these fees was determined based on
the percentage of your Income Fund's total assets as of March 31, 1999
to the total assets of all of the Income Funds as of March 31, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of the
Income Funds in connection with the Acquisition is estimated to be
$895,326. Your Income Fund's pro-rata portion of these costs was
determined based on the percentage of the value of the APF Share
consideration payable to your Income Fund, based on the exchange value,
to the total value of the APF Share consideration payable to all of the
Income Funds, based on the exchange value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer fact sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are
acquired by APF, all of the solicitation fees will be payable by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing a majority of units is required to
approve a "Liquidating Sale," which is defined by the partnership agreement to
include a transaction or series of transactions resulting in the transfer of
80% or more in value of your Income Fund's restaurant properties acquired
within two years of the initial date of the
S-9
<PAGE>
prospectus (October 1992). Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing a majority
of units.
Required Amendment to the Partnership Agreement
Your Income Fund's partnership agreement includes one provision that may
prevent the successful completion of APF's Acquisition of your Income Fund.
This provision must be amended in order to successfully complete the
Acquisition. Therefore, if you vote "For" the Acquisition, you will also be
asked to vote in favor of this amendment. The proposed amendment is summarized
below:
. Amendment to Roll-Up Prohibition. Article 21 of the partnership
agreement currently provides that your Income Fund may not participate
in any transaction involving (i) the acquisition, merger, conversion or
consolidation, either directly or indirectly, of your Income Fund, and
(ii) the issuance of securities of any other partnership, real estate
investment trust, corporation, trust or other entity that would be
created or would survive after the successful completion of such
transaction.
If the Limited Partners holding a majority of the units approve this
amendment to your Income Fund's partnership agreement your Income Fund, Article
21 will be deleted in its entirety.
Partnership Agreement Amendment Procedures
Pursuant to Article 13 of your Income Fund's partnership agreement, we may
propose amendments to the partnership agreement. Article 13 of the partnership
agreement requires that we furnish you with a verbatim statement of the
proposed amendment, which is attached to this supplement as Appendix C, and to
include an opinion of our counsel regarding whether the proposed amendment
would result in changing your Income Fund to a general partnership, changing
our liability or your liability, or allowing you to take part in the control or
management of your Income Fund. The form of opinion of Baker & Hostetler LLP is
attached to this supplement as Appendix D.
Consequence of Failure to Approve the Acquisition or the Amendments
If the Limited Partners of your Income Fund representing a majority of units
do not vote "For" the Acquisition and the proposed amendment to the partnership
agreement, the Acquisition may not be consummated under the terms of the
partnership agreement. In such event, we plan to continue to operate your
Income Fund as a going concern and to eventually dispose of your Income Fund's
restaurant properties approximately 7 to 12 years after they were acquired or
as soon thereafter if, in our opinion, market conditions permit, as
contemplated by the terms of the partnership agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Fund, have scheduled a special meeting
of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at
. We and members of APF's management
intend to solicit actively your support for the Acquisition and would like to
use the special meeting to answer questions about the Acquisition and the
solicitation materials and to explain in person our reasons for recommending
that you vote "For" the Acquisition.
S-10
<PAGE>
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain their votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning on attending the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about
, 1999 and will continue until the later of (a) , 1999, a
date not less than 60 calendar days from the initial delivery of the
solicitation materials, or (b) such later date as we may select and as to which
we give you notice. At our discretion, we may elect to extend the solicitation
period. Under no circumstances will the solicitation period be extended beyond
March 31, 2000. Any consent form received by Corporate Election Services prior
to 5:00 p.m., Eastern time, on the last day of the solicitation period will be
effective provided that such consent form has been properly completed and
signed. If you fail to return a signed consent form by the end of the
solicitation period, your units will be counted as voting "Against" the
Acquisition of your Income Fund and you will receive APF Shares if your Income
Fund is acquired. If you prefer, you may instead vote by telephone according to
the instructions on your consent form.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND
THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
S-11
<PAGE>
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the quarter
ended March 31, 1999, the aggregate amounts accrued or paid by your Income Fund
to us are shown below under "Historical Distributions Paid to the General
Partners and Affiliates" and the estimated amounts of compensation that would
have been paid had the Acquisition been in effect for the periods presented,
are shown below under "Pro Forma Distributions to Be Paid to the General
Partners Following the Acquisition":
<TABLE>
<CAPTION>
Year Ended December 31, Quarter Ended
-------------------------- March 31,
1996 1997 1998 1999
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the
General Partners and Affiliates:
General Partner Distributions...... -- -- -- --
Accounting and Administrative
Services.......................... $ 97,722 $ 92,866 $107,911 $30,501
Property Management Fees........... 40,244 40,218 41,537 10,530
Broker/Dealer Commissions.......... -- -- -- --
Due Diligence and Marketing Support
Fees.............................. -- -- -- --
Acquisition Fees................... -- -- -- --
Asset Management Fees.............. -- -- -- --
Real Estate Disposition Fees(1).... -- -- -- --
-------- -------- -------- -------
Total historical................. $137,966 $133,084 $149,448 $41,031
Pro Forma Distributions to Be Paid to
the General Partners Following the
Acquisition:
Cash Distributions on APF Shares... $ 34,433 $ 26,427 $ 34,433 $ 7,690
Salary Compensation................ -- -- -- --
-------- -------- -------- -------
Total pro forma.................. $ 34,433 $ 26,427 $ 34,433 $ 7,690
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to certain minimum
returns to the Limited Partners. To date, no such fees have been paid since
the required minimum returns have not been made to the Limited Partners.
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
contained herein under the caption "Financial Statements" and in the consent
solicitation under the caption "Summary -- Our Reasons for Supporting the
Acquisition -- Prices for Income Fund Units."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Quarter Ended
March 31,
Year Ended December 31, 1999
------------------------ ----------------
Pro
1994 1995 1996 1997 1998 Historical Forma
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income........... $850 $860 $850 $850 $645 $190 $133
Distributions from Return of
Capital............................ -- -- -- -- 235 23 91
---- ---- ---- ---- ---- ---- ----
Total............................... $850 $860 $850 $850 $880 $213 $224
==== ==== ==== ==== ==== ==== ====
</TABLE>
S-12
<PAGE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from certain non-cash
items. This amount is not required to be presented as a return of capital
except for purposes of this table, and the Income Fund has not treated this
amount as a return of capital for any other purpose.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses during 1999. Thus, the pro forma information regarding
the distributions to APF stockholders for the quarter ended March 31, 1999 is
not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
.the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the Acquisition
with those of several alternatives, the Acquisition is more economically
attractive to you and the other Limited Partners than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding a majority of the outstanding units of your Income Fund and is subject
to certain closing conditions. Second, if your Income Fund is acquired, all
Limited Partners of your Income Fund who vote against the Acquisition will be
given the option of receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others, that we will be relieved
from certain ongoing liabilities with respect to the Income Fund if it is
acquired by APF. For a further discussion of the conflicts of interest and
potential benefits of the Acquisition to us, see "Conflicts of Interest" below.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the values of the
consideration which would have been received by
S-13
<PAGE>
you and the other Limited Partners in alternative transactions and concluded
that the Acquisition is fair based on such comparison. In addition, we believe
the Acquisition is the best way to maximize the return on your investment
because of your ability to participate in the potential appreciation of APF
Shares. Since the investment in your Income Fund is an investment in a static
portfolio due to the restrictions contained in your Income Fund's partnership
agreement and limited capital resources, your investments have less of an
opportunity to appreciate. Because APF is a growth-oriented operating company,
you will have the opportunity as an APF stockholder to participate in APF's
future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinions of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinions of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., an affiliate of CNL Group, Inc, and (3) Valuation
Associates has previously performed valuation appraisals for APF. See "Reports,
Opinions and Appraisals" in the consent solicitation.
On rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to, any other
aspect of the Acquisition, including:
.the value or fairness of the notes;
. the prices at which the APF Shares any trade following the Acquisition
or the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
.the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
.any other matters with respect to any specific individual partner or class
of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Legg Mason's opinion also does not compare the relative merits of the
Acquisition with those of any other transaction or business strategy which were
or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern . On the basis of these calculations, we believe that
the ultimate value of the APF Shares will exceed the going concern value and
liquidation value of your Income Fund.
S-14
<PAGE>
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Net Book Value of the Income Fund. We calculated the book value of your
Income Fund under generally accepted accounting principles, or GAAP, as of
March 31, 1999 per average $10,000 original investment. Since the calculation
of the book value was done on a GAAP basis, it is primarily based on historical
cost and, therefore, it is not indicative of the true fair market value of your
Income Fund. This figure was compared to three other figures:
(1) the value of the Income Fund if it commenced an orderly liquidation
of its investment portfolio on December 31, 1998,
(2) the value of the Income Fund if it continued to operate in
accordance with its existing partnership agreement and business plans, and
(3) the estimated value of the APF Shares, based on the exchange value,
paid to each Income Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated Range
of Values of APF
Original Shares per
Limited Partner Average $10,000
Investments Less Going Original Limited
any Distributions GAAP Book Liquidation Concern Partners
of Sales Proceeds(1) Value Value(2) Value(2) Investment
-------------------- --------- ----------- -------- ----------------
<S> <C> <C> <C> <C> <C>
CNL Income Fund XII,
Ltd.................... $10,000 $8,733 $9,501 $10,356 $10,402
</TABLE>
- --------
(1) The Income Fund has had no distributions of net sales proceeds.
(2) Liquidation and going concern values were based on appraisals prepared by
Valuation Associates. For a complete description of the methodologies
employed by Valuation Associates, see "Reports, Opinions and Appraisals" in
the consent solicitation.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have contractual
obligations pursuant to your Income Fund's partnership agreement as well as
state law to assess whether the terms of the Acquisition are fair and equitable
to the Limited Partners of your Income Fund without regard to whether the
Acquisition is fair and equitable to any of the other participants, including
the Limited Partners in other Income Funds. James M. Seneff, Jr. and Robert A.
Bourne act as the individual general partners of all of the Income Funds and
also as members of the Board of Directors of APF. While Messrs. Seneff and
Bourne have sought faithfully to discharge their obligations to your Income
Fund, there is an inherent conflict of interest in serving, directly or
indirectly, in a similar capacity with respect to your Income Fund and also on
APF's Board of Directors.
Lack of Independent Representation
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had
S-15
<PAGE>
been retained for the Income Funds, either collectively or on an individual
basis, the fees and expenses of the Acquisition would have been higher. No
group of Limited Partners was empowered to negotiate the terms and conditions
of the Acquisition or to determine what procedures should be used to protect
the rights and interests of the Limited Partners. In addition, no investment
banker, attorney, financial consultant or expert was engaged to represent the
interests of the Limited Partners. We have been the parties responsible for
structuring all the terms and conditions of the Acquisition. Legal counsel
engaged to assist with the preparation of the documentation for the
Acquisition, including this consent solicitation, was engaged by us and did not
serve, or purport to serve, as legal counsel for the Income Funds or Limited
Partners. If an independent representative had been retained for the Income
Funds, the terms of the Acquisition may have been different and possibly more
favorable to the Limited Partners. In particular, had separate representation
for each of the Income Funds been arranged by us, issues unique to the value of
each of the specific Income Funds might have been highlighted or received
greater attention, resulting in adjustments to the value assigned to the assets
of such Income Funds and increasing the number of APF Shares or notes that
would be allocable to such Income Fund if acquired in the Acquisition.
Substantial Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive three material benefits. These benefits include:
. With respect to our ownership in your Income Fund, we may be issued up to
17,855 APF Shares in the aggregate in accordance with the terms of your
Income Fund's partnership agreement. The 17,855 APF Shares issued to us
will have an estimated value, based on the exchange value, of
approximately $357,100.
. James M. Seneff, Jr. and Robert A. Bourne as your individual general
partners, will also continue to serve as directors of APF with Mr. Seneff
serving as Chairman of APF and Mr. Bourne serving as Vice Chairman.
Furthermore, they will be entitled to receive performance-based
incentives, including stock options, under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of the Income Funds, we are legally liable for all of
Income Funds liabilities to the extent that the Income Funds are unable
to satisfy such liabilities. Because the partnership agreement for each
Income Fund prohibits the Income Funds from incurring indebtedness, the
only liabilities the Income Funds have are liabilities with respect to
their ongoing business operations. In the event that one or more Income
Funds are acquired by APF, we would be relieved of our legal obligation
to satisfy the liabilities of the acquired Income Fund or Income Funds.
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Certain Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund. If
your Income Fund is acquired by APF, and you have voted "For" the Acquisition,
you will receive APF Shares. If you have voted "Against" the Acquisition but
your Income Fund is acquired by APF, you may elect to receive notes.
S-16
<PAGE>
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under certain circumstances, even
if APF were to make the same level of distributions as your Income Fund, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you. For certain other differences attributable to APF's status as a REIT,
see " Taxation of APF" and " Taxation of Stockholders Taxable Domestic
Stockholders" in the consent solicitation.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF, the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain and loss based on the
exchange value, for an average $10,000 original Limited Partner investment in
your Income Fund, is set forth in the table below for those Limited Partners
subject to federal income taxation.
<TABLE>
<CAPTION>
Estimated
Gain/(Loss) per
Average $10,000
Original Limited
Partner
Investment(1)
----------------
<S> <C>
CNL Income Fund XII, Ltd....................................... $1,650
</TABLE>
- --------
(1) Values are based on the exchange value established by APF. Upon listing
the APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be significantly below the exchange value.
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one more individuals or entities in exchange for the stock of that corporation,
and (2) immediately after the exchange, such individuals or entities are in
control of the corporation. For purposes of section 351(a), control is defined
as the ownership of stock possessing at least 80 percent of the total combined
voting power of all classes of stock entitled to vote and at least 80 percent
of the
S-17
<PAGE>
total number of shares of all other classes of stock of the corporation. APF
has represented to Shaw Pittman, APF's tax counsel, that, following the
Acquisition, the Limited Partners of the Income Funds will not own stock
possessing at least 80 percent of the total combined voting power of all
classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive notes, your Income Fund will receive solely APF Shares in exchange for
your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if
any, assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2004, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses that
you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to
S-18
<PAGE>
receive notes rather than APF Shares. Even though a Limited Partner's election
of the notes may decrease the amount of gain your Income Fund recognizes, the
electing Limited Partner still will be required to take into account his, her
or its share of your Income Fund's gain as determined under the partnership
agreement of your Income Fund. Therefore, Limited Partners who elect the notes
may recognize gain in the year of the Acquisition despite the fact that they
will not receive cash with which to pay the tax on the gain. Such Limited
Partners will adjust the basis of the notes as described below, and the
resulting increase in basis will decrease the amount of the gain recognized
over the term of the notes by the Limited Partners electing to receive notes.
See "-- Tax Consequences of Liquidation and Termination of Your Income Fund"
below.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition, including gain or loss resulting from the Acquisition. If
your taxable year is not the calendar year, you could be required to recognize
as income in a single taxable year your share of your Income Fund's income
attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units, and your holding period
for the notes for purposes of determining capital gain or loss from the
disposition of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17) or
(20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
For a discussion of the taxation of APF, see "Federal Income Tax
Considerations -- Taxation of APF" in the consent solicitation.
S-19
<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 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 2,307,364 1,391,466 8,137 (2,450,663)(b),(c)
Interest and
Other Income..... 2,214,763 0 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 0 1,095,269 2,563,714 1,323,577 64,186 (377,734)(e)
Management and
Advisory Fees.... 697,364 0 697,364 0 0 611,196 (1,308,560)(f)
Fees to Related
Parties.......... 0 0 0 23,326 292,575 0 (292,786)(g)
Interest
Expense.......... 0 0 0 50,730 0 4,769,268 0
State Taxes...... 235,208 0 235,208 0 0 0 0
Depreciation--
Other............ 0 0 0 39,581 26,238 0 0
Depreciation--
Property......... 1,548,813 349,465(a) 1,898,278 0 0 0 0
Amortization..... 7,368 0 7,368 0 0 0 534,165 (h)
Transaction
Costs............ 125,926 0 125,926 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
Total Expenses.. 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650 (1,444,915)
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) $ (943,680)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 0 17,271 0 0 0 0
Gain on Sale of
Properties....... 0 0 0 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 (215,797) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
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) (943,680)
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) $(1,192,359)
=========== ========== =========== ========== ========== ========== ===========
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund XII, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $14,523,161 $ 983,589 $ 28,157 (j) $15,534,907
Fees............. 1,256,304 0 (28,926)(k) 1,227,378
Interest and
Other Income..... 7,687,325 19,755 0 7,707,080
------------ ---------- ------------------ ------------
Total Revenue... $23,466,790 $1,003,344 $ (769) $24,469,365
Expenses:
General and
Administrative... 4,669,012 60,550 (29,656)(l),(m) 4,699,906
Management and
Advisory Fees.... 0 10,530 10,530 (n) 0
Fees to Related
Parties.......... 23,115 0 0 23,115
Interest
Expense.......... 4,819,998 0 0 4,819,998
State Taxes...... 235,208 20,764 9,724 (o) 265,696
Depreciation--
Other............ 65,819 0 0 65,819
Depreciation--
Property......... 1,898,278 84,209 36,234 (p) 2,018,721
Amortization..... 541,533 497 0 542,030
Transaction
Costs............ 125,926 35,419 0 161,345
------------ ---------- ------------------ ------------
Total Expenses.. 12,378,889 211,969 5,772 12,596,630
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties and
Provision for
Losses on
Properties....... $11,087,901 $ 791,375 $ (6,541) $11,872,735
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 71,138 (6,976)(q) 81,433
Gain on Sale of
Properties....... 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 0 (215,797)
------------ ---------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 10,889,375 862,513 (13,517) 11,738,371
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ---------- ------------------ ------------
Net Earnings
(Losses)......... $10,889,375 $ 862,513 $(13,517) $11,738,371
============ ========== ================== ============
</TABLE>
S-20
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
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
============ =========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 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
============ =========== ============ ========== ========== ============ ===========
Weighted average
units
outstanding
during period... n/a n/a n/a n/a n/a n/a n/a
============ =========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,401 n/a 37,347,401 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 n/a 37,348,464 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... 14,237,405 n/a n/a n/a n/a n/a n/a
Cash
distributions
declared per
$10,000
Investment...... 191 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 $ -- $ -- $ -- $ 0
Mortgages/notes
receivable...... $ 41,269,740 0 $ 41,269,740 $ -- $ -- $247,896,287 $ 0
Receivables,
net............. $ 548,862 0 $ 548,862 $7,141,967 $5,457,493 $ 1,969,339 (148,629)(w)
Investment
in/due from
joint ventures.. $ 1,083,564 0 $ 1,083,564 $ -- $ -- $ -- 0
Total assets.... $708,694,145 $33,656,518(u) $742,350,663 $8,223,820 $6,308,406 $264,700,433 $32,078,824 (v1),(w)
Total
liabilities/minority
interest........ $ 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 $32,499,194 (v1),(x)
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund XII, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- ------------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 542 48 n/a 590
============== =========== ==================== ==================
Earnings per
share/unit...... $ n/a $ 0.19 $ n/a $ 0.26
============== =========== ==================== ==================
Book value per
share/unit...... $ n/a $ 8.73 $ n/a $ 16.44
============== =========== ==================== ==================
Dividends per
share/unit...... $ n/a $ 0.21 $ n/a $ n/a
============== =========== ==================== ==================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 3.30x
============== =========== ==================== ==================
Weighted average
units
outstanding
during period... n/a 4,500,000 n/a n/a
============== =========== ==================== ==================
Weighted average
shares
outstanding
during period... 43,497,401 n/a 2,358,348 45,855,749 (r)
============== =========== ==================== ==================
Shares
outstanding..... 43,498,464 n/a 2,358,348 45,856,812
============== =========== ==================== ==================
Cash
distributions
declared:....... n/a 956,252 n/a $ 19,750,073 (s)
==================
Cash
distributions
declared per
$10,000
Investment...... n/a 213 n/a $ 215 (t)
==================
Balance sheet
data:
Real estate
assets, net..... $ 647,547,023 $33,045,082 $12,267,077 (v2) $ 692,859,162
Mortgages/notes
receivable...... $ 289,166,027 $ -- 0 $ 289,166,027
Receivables,
net............. $ 14,969,032 $ 43,584 $ (11,351)(y) $ 15,001,265
Investment
in/due from
joint ventures.. $ 1,083,564 $ 2,652,267 $ 1,728,225 (v2) $ 5,464,056
Total assets.... $1,053,662,146 $40,358,958 $ 7,858,510 (v2),(y) $1,101,879,614
Total
liabilities/minority
interest........ $ 346,929,801 $ 1,061,856 $ (11,351)(y) $ 347,980,306
Total equity.... $ 706,732,345 $39,297,102 $ 7,869,861 (v2) $ 753,899,308
</TABLE>
S-21
<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 Advisor,
the CNL Restaurant Financial Services Group and the Income Fund:
<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 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
</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>
(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)
<TABLE>
<S> <C>
Amortization of goodwill......................................... $534,165
</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 $28,157 in accrued rental income resulting from the straight-
lining of scheduled rent increases throughout the lease terms for the
leases acquired from the Income Fund as if the leases had been acquired on
January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income Fund:
<TABLE>
<S> <C>
Management fees................................................. $(10,530)
Reimbursement of administrative costs........................... (18,396)
--------
$(28,926)
========
</TABLE>
S-22
<PAGE>
(l) Represents the elimination of $18,396 in administrative costs reimbursed by
the Income Fund to the Advisor.
(m) Represents savings of $11,260 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 $10,530 in management fees by the Income Fund
to the Advisor.
(o) Represents additional state income taxes of $9,724 resulting from assuming
that acquisitions of properties that had been operational when APF acquired
them from January 1, 1999 through May 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 Fund 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 $36,234 as a result of
adjusting the historical basis of the real estate wholly owned by the
Income Fund to fair value as a result of accounting for the Acquisition of
the Income Fund under the purchase accounting method. The adjustment to the
basis of the buildings is being depreciated using the straight-line method
over the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $6,976 as a
result of adjusting the historical basis of the real estate owned by the
Income Fund, indirectly through joint venture or tenancy in common
arrangements, to fair value as a result of accounting for the Acquisition
of the Income Fund under the purchase accounting method. The adjustment to
the basis of the buildings owned indirectly by the Income Fund is being
depreciated using the straight-line method over the remaining useful lives
of the properties.
(r) Common shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 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 Fund using the purchase
accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Shares Offered.......... 3,800,000 2,350,000 2,358,348.15 8,508,348.15
Exchange Value.......... $ 20 $ 20 $ 20 $ 20
Share Consideration..... $76,000,000 $47,000,000 $ 47,166,963 $170,166,963
Cash Consideration...... -- -- 518,000 518,000
APF Transaction Costs... 4,765,669 2,947,190 2,990,141 10,703,000
----------- ----------- ------------ ------------
Total Purchase Price... $80,765,669 $49,947,190 $ 50,675,104 $181,387,963
=========== =========== ============ ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 7,141,252 $10,006,878 $ 39,297,102 $ 56,445,232
Purchase Price
Adjustments:
Land and buildings on
operating leases...... 9,773,413 9,773,413
Net investment in
direct financing
leases................ 2,493,664 2,493,664
Investment in joint
ventures.............. 1,728,225 1,728,225
Accrued rental income.. (2,574,477) (2,574,477)
Intangibles and other
assets................ (2,792,876) (42,823) (2,835,699)
Goodwill*.............. 42,733,188 -- 42,733,188
Excess purchase price.. 73,624,417 -- -- 73,624,417
----------- ----------- ------------ ------------
Total Allocation....... $80,765,669 $49,947,190 $ 50,675,104 $181,387,963
=========== =========== ============ ============
</TABLE>
- --------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
S-23
<PAGE>
The APF Transaction costs of $10,703,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,624,417 was
expensed at March 31, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations". Goodwill of 42,733,188 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... 73,624,417
Goodwill for CFC (Intangibles and other assets)... 42,733,188
CFC/CFS Org Costs/Other Assets................... 2,792,876
Cash to pay APF transaction costs................ 7,712,859
APF Common Stock................................. 61,500
APF APIC......................................... 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital................................. 39,297,102
Land and buildings on operating leases............ 9,773,413
Net investment in direct financing leases......... 2,493,664
Investment in joint ventures...................... 1,728,225
Accrued rental income............................ 2,574,477
Intangibles and other assets..................... 42,823
Cash to pay APF Transaction costs................ 2,990,141
Cash consideration to Income Fund................ 518,000
APF Common Stock................................. 23,583
APF APIC......................................... 47,143,380
(To record acquisition of Income Fund)
</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 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.
(y) Represents the elimination by the Income Fund of $11,351 in related party
payables recorded as receivables by the Advisor.
S-24
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND XII, LTD.
The following table sets forth certain financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
XII, Ltd." in this supplement.
<TABLE>
<CAPTION>
Quarter Ended
March 31, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 1,074,482 $ 1,122,544 $ 4,051,192 $ 4,522,216 $ 4,553,058 $ 4,570,571 $ 4,548,580
Net income (2).......... 862,513 958,303 2,933,537 3,952,214 3,943,043 4,014,372 4,027,834
Cash distributions
declared (3)........... 956,252 956,252 3,960,008 3,825,008 3,825,008 3,870,007 3,825,006
Net income per unit
(2).................... 0.19 0.21 0.65 0.87 0.87 0.88 0.89
Cash distributions
declared per unit (3).. 0.21 0.21 0.88 0.85 0.85 0.86 0.85
GAAP book value per
unit................... 8.73 8.98 8.75 8.98 8.95 8.93 8.90
Weighted average number
of Limited Partner
units outstanding...... 4,500,000 4,500,000 4,500,000 4,500,000 4,500,000 4,500,000 4,500,000
<CAPTION>
March 31, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $40,358,958 $41,570,874 $40,634,898 $41,430,990 $41,343,138 $41,229,132 $41,127,173
Total partners'
capital................ 39,297,102 40,419,363 39,390,841 40,417,312 40,290,106 40,172,071 40,027,706
</TABLE>
- --------
(1) Revenues include equity in earnings of joint ventures and adjustments to
accrued rental income due to the tenant of certain restaurant properties
filing for bankruptcy.
(2) Net income for the years ended December 31, 1998 and 1996, includes
$104,374 and $15,355, respectively, from a loss on sale of land and
building. Net income for the years ended December 31, 1998, includes
$206,535 for a provision for loss on building.
(3) Distributions for the years ended December 31, 1998 and 1995, include a
special distribution to the Limited Partners of $135,000 and $45,000,
respectively, which represented cumulative excess operating reserves.
S-25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND XII, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
August 20, 1991, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurants, as well as
properties upon which restaurants were to be constructed, which are leased
primarily to operators of national and regional fast-food and family-style
restaurant chains. The leases are triple-net leases, with the lessees generally
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of 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
S-26
<PAGE>
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
S-27
<PAGE>
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
S-28
<PAGE>
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
S-29
<PAGE>
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.
S-30
<PAGE>
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
S-31
<PAGE>
$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.
S-32
<PAGE>
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.
S-33
<PAGE>
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.
S-34
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998...... F-1
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998..................................................................... F-2
Condensed Statements of Partner's Capital for the Quarter Ended March 31,
1999 and
for the Year Ended December 31, 1998.................................... F-3
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998................................................................. F-4
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998............................................................ F-5
Report of Independent Accountants........................................ F-7
Balance Sheets as of December 31, 1998 and 1997.......................... F-8
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-9
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996............................................................ F-10
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................. F-12
Unaudited Pro Forma Financial Information................................ F-21
Unaudited Pro Forma Balance Sheet as of March 31, 1999................... F-22
Unaudited Pro Forma Statement of Earnings for the Quarter Ended March 31,
1999..................................................................... F-24
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998..................................................................... F-26
Unaudited Pro Forma Statement of Cash Flows for the Quarter Ended March
31, 1999................................................................. F-28
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................. F-30
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-32
</TABLE>
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
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-1
<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-2
<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-3
<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-4
<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-5
<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. 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-6
<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-7
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for
loss on building.............................. $20,703,333 $20,820,279
Net investment in direct financing leases...... 12,471,978 13,656,265
Investment in joint ventures................... 2,522,004 2,517,421
Cash and cash equivalents...................... 2,362,980 1,706,415
Receivables, less allowance for doubtful
accounts of $214,633 and $7,482............... 16,862 202,472
Prepaid expenses............................... 7,038 7,216
Lease costs, less accumulated amortization of
$3,256 and $1,307............................. 26,297 24,746
Accrued rental income, less allowance for
doubtful accounts of $6,323 in 1998........... 2,524,406 2,496,176
----------- -----------
$40,634,898 $41,430,990
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable............................... $ 21,195 $ 10,558
Accrued and escrowed real estate taxes
payable....................................... 10,137 3,244
Distributions payable.......................... 1,091,252 956,252
Due to related parties......................... 24,025 6,887
Rents paid in advance and deposits............. 97,448 36,737
Total liabilities............................ 1,244,057 1,013,678
Partners' capital.............................. 39,390,841 40,417,312
----------- -----------
$40,634,898 $41,430,990
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases...... $2,515,351 $2,455,312 $2,473,574
Adjustments to accrued rental income..... (224,867) -- --
Earned income from direct financing
leases.................................. 1,571,906 1,647,530 1,692,066
Contingent rental income................. 23,433 54,330 67,652
Interest and other income................ 70,227 87,719 119,267
---------- ---------- ----------
3,956,050 4,244,891 4,352,559
---------- ---------- ----------
Expenses:
General operating and administrative..... 148,427 162,593 173,614
Professional services.................... 32,758 28,665 39,121
Bad debt expense......................... 188,990 -- --
Management fees to related parties....... 41,537 40,218 40,244
Real estate taxes........................ 8,989 -- 7,891
State and other taxes.................... 17,653 18,496 18,471
Depreciation and amortization............ 344,110 320,030 315,319
Transaction costs........................ 24,282 -- --
---------- ---------- ----------
806,746 570,002 594,660
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Loss on Sale of Land and
Buildings, and Provision for Loss on
Building.................................. 3,149,304 3,674,889 3,757,899
Equity in Earnings of Joint Ventures....... 95,142 277,325 200,499
Loss on Sale of Land and Buildings......... (104,374) -- (15,355)
Provision for Loss on Building............. (206,535) -- --
---------- ---------- ----------
Net Income................................. $2,933,537 $3,952,214 $3,943,043
========== ========== ==========
Allocation of Net Income:
General partners......................... $ 30,894 $ 39,522 $ 39,533
Limited partners......................... 2,902,643 3,912,692 3,903,510
---------- ---------- ----------
$2,933,537 $3,952,214 $3,943,043
========== ========== ==========
Net Income Per Limited Partner Unit........ $ 0.65 $ 0.87 $ 0.87
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding......................... 4,500,000 4,500,000 4,500,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $112,356 $45,000,000 $(10,690,019) $11,123,278 $(5,374,544) $40,172,071
Distributions to
limited partners
($0.85 per limited
partner unit)......... -- -- -- (3,825,008) -- -- (3,825,008)
Net income............. -- 39,533 -- -- 3,903,510 -- 3,943,043
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 151,889 45,000,000 (14,515,027) 15,026,788 (5,374,544) 40,290,106
Distributions to
limited partners
($0.85 per limited
partner unit)......... -- -- -- (3,825,008) -- -- (3,825,008)
Net income............. -- 39,522 -- -- 3,912,692 -- 3,952,214
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 191,411 45,000,000 (18,340,035) 18,939,480 (5,374,544) 40,417,312
Distributions to
limited partners
($0.88 per limited
partner unit)......... -- -- -- (3,960,008) -- -- (3,960,008)
Net income............. -- 30,894 -- -- 2,902,643 -- 2,933,537
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $222,305 $45,000,000 $(22,300,043) $21,842,123 $(5,374,544) $39,390,841
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............ $ 4,094,016 $ 3,736,731 $ 3,951,047
Distributions from joint ventures..... 205,815 256,653 190,596
Cash paid for expenses................ (243,316) (252,145) (278,240)
Interest received..................... 60,265 65,749 88,286
----------- ----------- -----------
Net cash provided by operating ac-
tivities........................... 4,116,780 3,806,988 3,951,689
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and build-
ing.................................. 483,549 -- 1,640,000
Additions to land and buildings on op-
erating leases....................... -- (55,000) --
Investment in joint ventures.......... (115,256) -- (1,645,024)
Collections on loan to tenant of joint
venture.............................. -- 4,886 7,741
Payment of lease costs................ (3,500) (26,052) --
----------- ----------- -----------
Net cash provided by (used in) in-
vesting activities................. 364,793 (76,166) 2,717
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners..... (3,825,008) (3,825,008) (3,870,008)
----------- ----------- -----------
Net cash used in financing activi-
ties............................... (3,825,008) (3,825,008) (3,870,008)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ 656,565 (94,186) 84,398
Cash and Cash Equivalents at Beginning
of Year................................ 1,706,415 1,800,601 1,716,203
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 2,362,980 $ 1,706,415 $ 1,800,601
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................ $ 2,933,537 $ 3,952,214 $ 3,943,043
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense...................... 188,990 -- --
Depreciation.......................... 342,161 317,189 313,319
Amortization.......................... 1,949 2,841 2,000
Equity in earnings of joint venture,
net of distributions................. 110,673 (20,672) (9,903)
Loss on sale of land and buildings.... 104,374 -- 15,355
Provision for loss on building........ 206,535 -- --
Decrease in net investment in direct
financing leases..................... 164,614 132,771 121,597
Decrease (increase) in receivables.... (3,380) (4,450) 48,671
Decrease (increase) in prepaid ex-
penses............................... 178 (430) (4,862)
Increase in accrued rental income..... (28,230) (533,121) (518,502)
Increase (decrease) in accounts pay-
able and accrued expenses............ 17,530 (10,207) 8,745
Increase (decrease) in due to related
parties.............................. 17,138 3,906 (4,269)
Increase (decrease) in rents paid in
advance and deposits................. 60,711 (33,053) 36,495
----------- ----------- -----------
Total adjustments................... 1,183,243 (145,226) 8,646
----------- ----------- -----------
Net Cash Provided by Operating Activi-
ties................................... $ 4,116,780 $ 3,806,988 $ 3,951,689
=========== =========== ===========
Supplemental Schedule of Non-Cash Fi-
nancing Activities:
Distributions declared and unpaid at De-
cember 31.............................. $ 1,091,252 $ 956,252 $ 956,252
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund XII, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators or franchisees of national and regional fast-food
and family-style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to their fair
values. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
estimate of net cash flows expected to be generated from its properties and the
need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to
F-12
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
decrease rental or other income or increase bad debt expense for the current
period, although the Partnership continues to pursue collection of such
amounts. If amounts are subsequently determined to be uncollectible, the
corresponding receivable and allowance for doubtful accounts are decreased
accordingly.
Investment in Joint Ventures--The Partnership's investments in Des Moines
Real Estate Joint Venture, Williston Real Estate Joint Venture, Kingsville Real
Estate Joint Venture, Middleburg Joint Venture and Columbus Joint Venture are
accounted for using the equity method since the Partnership shares control with
affiliates which have the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Lease Costs--Brokerage fees associated with negotiating a new lease are
amortized over the term of the new lease using the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
2. Leases:
The Partnership leases its land and buildings to operators of national and
regional fast-food and family-style restaurants. The leases are accounted for
under the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." Some of the leases have been classified as operating
leases and some of the leases have been classified as direct financing leases.
For the leases classified as direct financing leases, the building portions of
the property leases are accounted for as direct financing leases while the land
portions of the majority of the leases are operating leases. Substantially all
leases are for 14 to 20 years and provide for minimum and contingent rentals.
In addition, the tenant pays all property taxes and assessments,
F-13
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
fully maintains the interior and exterior of the building and carries insurance
coverage for public liability, property damage, fire and extended coverage. The
lease options generally allow tenants to renew the leases for two to four
successive five-year periods subject to the same terms and conditions as the
initial lease. Most leases also allow the tenant to purchase the property at
fair market value after a specified portion of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................... $12,584,387 $12,837,754
Buildings.......................................... 10,120,580 9,443,412
----------- -----------
22,704,967 22,281,166
Less accumulated depreciation...................... (1,795,099) (1,460,887)
----------- -----------
20,909,868 20,820,279
Less allowance for loss on building................ (206,535) --
----------- -----------
$20,703,333 $20,820,279
=========== ===========
</TABLE>
In March 1997, the Partnership entered into a new lease for the property in
Tempe, Arizona. In connection therewith, the Partnership incurred $55,000 in
renovation costs which were completed in May 1997.
In December 1998, the Partnership sold its property in Monroe, North
Carolina, and received net sales proceeds of $483,549, resulting in a loss of
$104,374 for financial reporting purposes.
Some leases provide for escalating guaranteed minimum rents throughout the
lease term. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998, 1997 and 1996, the Partnership recognized $28,230 (net of $6,323 in
reserves and $224,867 in write-offs), $533,121, and $518,502, respectively, of
such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 2,212,548
2000............................................................. 2,214,984
2001............................................................. 2,224,926
2002............................................................. 2,244,948
2003............................................................. 2,521,540
Thereafter....................................................... 21,695,400
-----------
$33,114,346
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
F-14
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
During the year ended December 31, 1998, the Partnership established an
allowance for loss on building of $206,535, relating to the Long John Silver's
property in Morganton, North Carolina. The tenant of this property filed for
bankruptcy and ceased payment of rents under the terms of its lease agreement.
The allowance represents the difference between the carrying value of the
property at December 31, 1998, and the current estimated net realizable value
for this property.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Minimum lease payments receivable.................. $24,790,776 $28,413,665
Estimated residual values.......................... 3,924,188 4,190,941
Less unearned income............................... (16,242,986) (18,948,341)
----------- -----------
Net investment in direct financing leases.......... $12,471,978 $13,656,265
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,678,170
2000............................................................. 1,678,170
2001............................................................. 1,678,170
2002............................................................. 1,678,170
2003............................................................. 1,731,030
Thereafter....................................................... 16,347,066
-----------
$24,790,776
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
During the year ended December 31, 1998, three of the Partnership's leases
with Long John Silver's, Inc. were rejected in connection with the tenant
filing for bankruptcy. As a result, the Partnership reclassified these assets
from net investment in direct financing leases to land and buildings on
operating leases. In accordance with Statement of Financial Accounting
Standards No. 13, "Accounting for Leases," the Partnership recorded the
reclassified assets at the lower of original cost, present fair value, or
present carrying value. No loss on termination of direct financing leases was
recorded for financial reporting purposes.
5. Investment in Joint Ventures:
As of December 31, 1998, the Partnership had a 59.05%, an 18.61%, a 31.13%,
and an 87.54% interest in the profits and losses of Williston Real Estate Joint
Venture, Des Moines Real Estate Joint Venture, Kingsville Real Estate Joint
Venture, and Middleburg Joint Venture, respectively. The remaining interests in
these joint ventures are held by affiliates of the Partnership which have the
same general partners.
In August 1998, the Partnership entered into a joint venture agreement,
Columbus Joint Venture, with affiliates of the general partners, to construct
and hold one restaurant property. As of December 31, 1998, the
F-15
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Partnership contributed amounts to purchase land and pay construction costs
relating to the joint venture. The Partnership has agreed to contribute
additional amounts to the joint venture for construction costs. As of December
31, 1998 the Partnership owned a 27.72% interest in the profits and losses of
this joint venture. When funding is complete, the Partnership expects to have
an approximate 28 percent interest in the profits and losses of the joint
venture. The Partnership accounts for its investment in this joint venture
under the equity method since the Partnership shares control with affiliates.
Williston Real Estate Joint Venture, Des Moines Real Estate Joint Venture,
Kingsville Real Estate Joint Venture, Middleburg Joint Venture, and Columbus
Joint Venture each own and lease one property to an operator of national fast-
food or family-style restaurants. The following presents the joint ventures'
combined, condensed financial information at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land................................................ $2,498,504 $1,768,636
Net investment in direct financing leases, less
allowance for impairment in carrying value.......... 2,219,798 2,446,688
Cash................................................. 5,671 6,893
Receivables.......................................... -- 13,843
Accrued rental income................................ 166,447 157,252
Other assets......................................... 283 443
Liabilities.......................................... 483,138 7,673
Partners' capital.................................... 4,407,565 4,386,082
Revenues............................................. 337,881 481,085
Provision for loss on land and direct financing
lease............................................... (316,113) --
Net income (loss).................................... (38,867) 446,047
</TABLE>
The Partnership recognized income totalling $95,142, $277,325, and $200,499
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
6. Receivables:
During 1993, the Partnership loaned $208,855 to the tenant of the property
owned by Kingsville Real Estate Joint Venture in connection with the purchase
of equipment for the restaurant property. The loan, which bore interest at a
rate of ten percent, was payable over 84 months and was collateralized by the
restaurant equipment. Receivables at December 31, 1997, included $188,642
relating to this loan, including accrued interest of $7,488. During the year
ended December 31, 1998, the Partnership established an allowance for
doubtful accounts of $205,965, which represented the entire amount outstanding
under the loan plus accrued interest, due to the uncertainty of collectibility
of this note. No amounts relating to this loan are included in receivables at
December 31, 1998.
7. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to
F-16
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
receipt by the limited partners of an aggregate, ten percent, cumulative,
noncompounded annual return on their invested capital contributions (the
"Limited Partners' 10% Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their Limited
Partners' 10% Return, plus the return of their adjusted capital contributions.
The general partners will then receive, to the extent previously subordinated
and unpaid, a one percent interest in all prior distributions of net cash flow
and a return of their capital contributions. Any remaining sales proceeds will
be distributed 95 percent to the limited partners and five percent to the
general partners. Any gain from the sale of a property not in liquidation of
the Partnership is, in general, allocated in the same manner as net sales
proceeds are distributable. Any loss from the sale of a property is, in
general, allocated first, on a pro rata basis, to partners with positive
balances in their capital accounts; and thereafter, 95 percent to the limited
partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the year ended December 31, 1998, the Partnership declared
distributions to the limited partners of $3,960,008, and during each of the
years ended December 31, 1997 and 1996, the Partnership declared distributions
to the limited partners of $3,825,008. No distributions have been made to the
general partners to date.
F-17
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
8. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $2,933,537 $3,952,214 $3,943,043
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (224,652) (249,366) (259,752)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 164,614 132,771 121,597
Provision for loss on building.......... 206,535 -- --
Loss on sale of land and buildings for
tax reporting purposes less than (in
excess of) loss for financial reporting
purposes............................... 25,699 -- (26,151)
Capitalization of transaction costs for
tax reporting purposes................. 24,282 -- --
Equity in earnings of joint ventures for
tax reporting purposes in excess of
(less than) equity in earnings of joint
ventures for financial reporting
purposes............................... 138,311 (51,481) (46,345)
Allowance for doubtful accounts......... 207,151 (15,913) (16,396)
Accrued rental income................... (28,230) (533,121) (518,502)
Rents paid in advance................... 60,711 (39,303) 36,495
---------- ---------- ----------
Net income for federal income tax
purposes............................... $3,507,958 $3,195,801 $3,233,989
========== ========== ==========
</TABLE>
9. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors,
Inc. (hereinafter referred to as the "Affiliate") performed certain services
for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliates
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate a management fee of one percent of the sum of gross
revenues from properties owned by the Partnership and the Partnership's
allocable share of gross revenues from joint ventures. The management fee,
which will not exceed fees which are competitive for similar services in the
same geographic area, may or may not be taken, in whole or in part as to any
year, in the sole discretion of the Affiliate. The Partnership incurred
management fees of $41,537, $40,218, and $40,244 for the years ended December
31, 1998, 1997, and 1996, respectively.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the net sales proceeds are
reinvested in a replacement property, no such real estate disposition
F-18
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
fees will be incurred until such replacement property is sold and the net sales
proceeds are distributed. The payment of the real estate disposition fee is
subordinated to receipt by the limited partners of their aggregate 10%
Preferred Return, plus their adjusted capital contributions. No deferred,
subordinated real estate disposition fees have been incurred since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $107,911, $92,866, and $97,722 for the
years ended December 31, 1998, 1997, and 1996, respectively, for such services.
The due to related parties at December 31, 1998 and 1997, totalled $24,025
and $6,887, respectively.
10. Concentration of Credit Risk:
The following schedule presents rental and earned income from individual
lessees, or affiliated groups of lessees, each representing more than ten
percent of the Partnership's total rental and earned income (including the
Partnership's share of rental and earned income from joint ventures) for each
of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Foodmaker, Inc............................ $1,023,630 $1,024,667 $1,024,667
Flagstar Enterprises, Inc. (and Denny's
Inc. and Quincy's Restaurants, Inc. for
the years ended December 31, 1997 and
1996).................................... 784,922 1,216,908 1,224,953
Long John Silver's, Inc................... 508,351 647,829 649,992
Advantica Restaurant Group, Inc. (and
Denny's, Inc. and Quincy's Restaurants,
Inc. for the year ended December 31,
1998).................................... 424,742 N/A N/A
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of rental and earned income from joint ventures) for each of the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Jack in the Box............................. $1,023,630 $1,024,667 $1,024,667
Hardee's.................................... 784,922 787,260 791,998
Denny's..................................... 782,486 807,547 818,672
Long John Silver's.......................... 574,044 713,522 715,685
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant or group of affiliated tenants and the chain did not represent more than
ten percent of the Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
F-19
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In June 1998, a tenant, Long John Silver's, Inc., filed for bankruptcy and
rejected the leases relating to three of its eight leases and ceased making
rental payments to the Partnership. In December 1998, the Partnership sold one
of the vacant properties and intends to reinvest the net sales proceeds from
the sale of this
property in an additional property. The Partnership will not recognize rental
and earned income from these two remaining properties until new tenants for
these properties are located or until the properties are sold and the proceeds
from such sales are reinvested in additional properties. While Long John
Silver's, Inc. has not rejected or affirmed the remaining five leases, there
can be no assurance that some or all of the leases will not be rejected in the
future. The lost revenues resulting from the two remaining vacant properties,
as described above, and the possible rejection of the remaining five leases
could have an adverse effect on the results of operations of the Partnership,
if the Partnership is not able to re-lease these properties in a timely manner.
The general partners are currently seeking either new tenants or purchasers for
the two remaining vacant properties.
11. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 4,768,496 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $46,951,127 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
12. Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 11 being adjusted to 2,384,248 shares valued at $20.00 per
APF share.
F-20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of the Advisor
and the CNL Restaurant Financial Services Group, and the acquisition of the
Income Fund (the acquisition of the Income Fund is referred to as the
"Acquisition"), and is based on estimates and assumptions set forth below in
the notes to such information which included pro forma adjustments. This
unaudited pro forma financial information has been prepared utilizing the
historical financial statements of APF, the historical combined financial
information of the Income Fund, the Advisor and CNL Restaurant Financial
Services Group (shown separately as CFS and CFC) and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, Income Fund, Advisor and CNL Restaurant Financial Services Group. The
pro forma balance sheet assumes that the Acquisition occurred on 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.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of March 31, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL
Historical Pro Forma Historical Financial
APF Adjustments Subtotal Advisor Services, Inc.
------------ ----------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating
leases (net
depreciation).......... 475,787,661 58,749,637 (A) 534,537,298 0 0
Net Investment in Direct
Financing Leases....... 123,270,117 0 123,270,117 0 0
Mortgages and Notes
Receivable............. 41,269,740 0 41,269,740 0 0
Other Investments....... 16,199,792 0 16,199,792 0 0
Investment In Joint
Ventures............... 1,083,564 0 1,083,564 0 0
Cash and Cash
Equivalents............ 35,796,119 (25,093,119)(A) 10,703,000 591,712 552,415
Restricted
Cash/Certificates of
Deposit................ 2,007,278 0 2,007,278 0 0
Receivables (net
allowances) /Due from
Related Party.......... 548,862 0 548,862 7,141,967 5,457,493
Accrued Rental Income... 5,007,334 0 5,007,334 0 0
Other Assets............ 7,723,678 0 7,723,678 490,141 298,498
Goodwill................ 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Assets........... $708,694,145 $33,656,518 $742,350,663 $8,223,820 $6,308,406
============ =========== ============ ========== ==========
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 3,464,190 $ 0 $ 3,464,190 $ 576,531 $ 304,375
Accrued Construction
Costs
Payable................ 10,172,169 0 10,172,169 0 0
Distributions Payable... 0 0 0 119,808 0
Due to Related Parties.. 148,629 0 148,629 0 563,724
Income Tax Payable...... 0 0 0 0 0
Line of Credit/Notes
payable................ 34,150,000 33,656,518 (A) 67,806,518 386,229 0
Deferred Income......... 2,052,530 0 2,052,530 0 0
Rents Paid in Advance... 1,340,636 0 1,340,636 0 0
Minority Interest....... 280,970 0 280,970 0 0
Common Stock............ 373,483 0 373,483 0 0
Common Stock--Class A... 0 0 0 6,400 2,000
Common Stock--Class B... 0 0 0 3,600 724
Additional Paid-in-
capital................ 670,005,177 0 670,005,177 4,617,047 5,303,503
Accumulated
distributions in excess
of net earnings........ (13,293,639) 0 (13,293,639) 2,514,205 134,080
Partners Capital........ 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Liabilities and
Equity................ $708,694,145 $33,656,518 $742,350,663 $8,223,820 $6,308,406
============ =========== ============ ========== ==========
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of March 31, 1999
<TABLE>
<CAPTION>
Historical Historical
CNL Combining CNL
Financial Pro Forma Combined Income Pro Forma Adjusted
Corp. Adjustments APF Fund XII Ltd. Adjustments Pro Forma
------------ ------------ -------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... 0 0 534,537,298 20,619,125 9,773,413 (B2) 564,929,836
Net Investment in Direct
Financing Leases....... 0 0 123,270,117 12,425,957 2,493,664 (B2) 138,189,738
Mortgages and Notes
Receivable............. 247,896,287 0 289,166,027 -- 0 289,166,027
Other Investments....... 6,353,482 0 22,553,274 0 0 22,553,274
Investment In Joint
Ventures............... 0 0 1,083,564 2,652,267 1,728,225 (B2) 5,464,056
Cash and Cash
Equivalents............ 4,896,688 (7,712,859)(B1) 9,030,956 2,000,725 (2,990,141)(B2) 7,523,540
(518,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 853,243 0 2,860,521 -- 0 2,860,521
Receivables (net
allowances)/Due from
Related Party.......... 1,969,339 (148,629)(C) 14,969,032 43,584 (11,351)(E) 15,001,265
Accrued Rental Income... 0 0 5,007,334 2,574,477 (2,574,477)(B2) 5,007,334
Other Assets............ 2,731,394 (2,792,876)(B1) 8,450,835 42,823 (42,823)(B2) 8,450,835
Goodwill................ 0 42,733,188 (B1) 42,733,188 0 0 42,733,188
------------ ------------ -------------- ----------- ------------ --------------
Total Assets........... $264,700,433 $ 32,078,824 $1,053,662,146 $40,358,958 $ 7,858,510 $1,101,879,614
============ ============ ============== =========== ============ ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 1,613,959 $ 0 $ 5,959,055 $ 54,629 $ 0 $ 6,013,684
Accrued Construction
Costs Payable.......... 0 0 10,172,169 0 0 10,172,169
Distributions Payable... 0 0 119,808 956,252 0 1,076,060
Due to Related Parties.. 31,310,681 (148,629)(C) 31,874,405 11,351 (11,351)(E) 31,874,405
Income Tax Payable...... 271,741 (271,741)(D) 0 0 0 0
Line of Credit/Notes
payable................ 226,937,481 0 295,130,228 0 0 295,130,228
Deferred Income......... 0 0 2,052,530 0 0 2,052,530
Rents Paid in Advance... 0 0 1,340,636 39,624 0 1,380,260
Minority Interest....... 0 0 280,970 0 0 280,970
Common Stock............ 0 61,500 (B1) 434,983 0 23,583(B2) 458,666
Common Stock--Class A... 200 (8,600)(B1) 0 0 0 0
Common Stock--Class B... 501 (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 3,937,095 122,938,500 (B1) 792,943,677 0 47,143,380(B2) 840,087,057
(13,857,645)(B1)
Accumulated
distributions in excess
of net earnings........ 628,775 (3,277,060)(B1) (86,646,315) 0 0 (86,646,315)
(73,624,417)(B1)
271,741 (D)
Partners Capital........ 0 0 0 39,297,102 (39,297,102)(B2) 0
------------ ------------ -------------- ----------- ------------ --------------
Total Liabilities and
Equity................ $264,700,433 $ 32,078,824 $1,053,662,146 $40,358,958 $ 7,858,510 $1,101,879,614
============ ============ ============== =========== ============ ==============
</TABLE>
F-23
<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
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $12,184,008 $2,339,153(a) $14,523,161 $ 0 $ 0 $ 0
Fees................... 0 0 0 2,307,364 1,391,466 8,137
Interest and Other
Income................ 2,214,763 0 2,214,763 47,213 129,362 5,233,919
----------- ---------- ----------- ---------- ---------- ----------
Total Revenue.......... $14,398,771 $2,339,153 $16,737,924 $2,354,577 $1,520,828 $5,242,056
Expenses:
General and
Administrative
Expenses.............. 1,095,269 0 1,095,269 2,563,714 1,323,577 64,186
Management and Advisory
Fees.................. 697,364 0 697,364 0 0 611,196
Fees Paid to Related
Parties............... 0 0 0 23,326 292,575 0
Interest Expense....... 0 0 0 50,730 0 4,769,268
State Taxes............ 235,208 0 235,208 0 0 0
Depreciation--Other.... 0 0 0 39,581 26,238 0
Depreciation--
Property.............. 1,548,813 349,465(a) 1,898,278 0 0 0
Amortization........... 7,368 0 7,368 0 0 0
Transaction Costs...... 125,926 0 125,926 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
Total Expenses......... 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, 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)
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 17,271 0 17,271 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Provision For Loss on
Properties............ (215,797) 0 (215,797) 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
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)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 127,496 48,017 73,166
----------- ---------- ----------- ---------- ---------- ----------
Net Earnings (Losses)... $10,490,297 $1,989,688 $12,479,985 $ (195,278) $ (73,545) $ (129,428)
=========== ========== =========== ========== ========== ==========
Earnings Per
Share/Unit............. $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ==========
Book Value Per
Share/Unit............. $ 17.59 $ 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
=========== ========== =========== ========== ========== ==========
Ratio of Earnings to
Fixed Charges.......... 50.03x n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========== ==========
Wtd. Avg. Units
Outstanding............ 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
=========== ========== =========== ========== ========== ==========
Shares Outstanding...... 37,348,464 n/a 37,348,464 n/a n/a n/a
=========== ========== =========== ========== ========== ==========
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 Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding...
Pro Forma Cash
Distributions Declared
per $10,000
Investment............
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Historical
Combining CNL
Pro Forma Combined Income Fund Pro Forma Adjusted
Adjustments APF XII, Ltd. Adjustments Pro Forma
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $14,523,161 $ 983,589 $ 28,157 (j) $ 15,534,907
Fees................... (2,450,663)(b),(c) 1,256,304 0 (28,926)(k) 1,227,378
Interest and Other
Income................ 62,068 (d) 7,687,325 19,755 0 7,707,080
----------- ----------- ---------- --------- ------------
Total Revenue.......... $(2,388,595) $23,466,790 $1,003,344 $ (769) $ 24,469,365
Expenses:
General and
Administrative
Expenses.............. (377,734)(e) 4,669,012 60,550 (29,656)(l),(m) 4,699,906
Management and Advisory
Fees.................. (1,308,560)(f) 0 10,530 (10,530)(n) 0
Fees Paid to Related
Parties............... (292,786)(g) 23,115 0 0 23,115
Interest Expense....... 0 4,819,998 0 0 4,819,998
State Taxes............ 0 235,208 20,764 9,724 (o) 265,696
Depreciation--Other.... 0 65,819 0 0 65,819
Depreciation--
Property.............. 0 1,898,278 84,209 36,234 (p) 2,018,721
Amortization........... 534,165 (h) 541,533 497 0 542,030
Transaction Costs...... 0 125,926 35,419 0 161,345
----------- ----------- ---------- --------- ------------
Total Expenses......... (1,444,915) 12,378,889 211,969 5,772 12,596,630
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties and
Provision for Losses on
Properties............. $ (943,680) $11,087,901 $ 791,375 $ (6,541) $ 11,872,735
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 0 17,271 71,138 (6,976)(q) 81,433
Gain on Sale of
Properties............ 0 0 0 0 0
Provision For Loss on
Properties............ 0 (215,797) 0 0 (215,797)
----------- ----------- ---------- --------- ------------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (943,680) 10,889,375 862,513 (13,517) 11,738,371
Benefit/(Provision) for
Federal Income Taxes.. (248,679)(i) 0 0 0 0
----------- ----------- ---------- --------- ------------
Net Earnings (Losses)... $(1,192,359) $10,889,375 $ 862,513 $ (13,517) $ 11,738,371
=========== =========== ========== ========= ============
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.19 $ n/a $ 0.26
=========== =========== ========== ========= ============
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.73 $ n/a $ 16.44
=========== =========== ========== ========= ============
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.21 $ n/a $ n/a
=========== =========== ========== ========= ============
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.30
=========== =========== ========== ========= ============
Wtd. Avg. Units
Outstanding............ n/a n/a 4,500,000 n/a n/a
=========== =========== ========== ========= ============
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,401 n/a 2,358,348 45,855,749 (r)
=========== =========== ========== ========= ============
Shares Outstanding...... 6,150,000 43,498,464 n/a 2,358,348 45,856,812
=========== =========== ========== ========= ============
Calculation of Pro Forma
Distributions:
Pro Forma Cash from
Operations from
Statement of Cash
Flows................. $(22,821,822)
Addback Pro Forma
Investments in Notes
Receivable............ 42,571,895
------------
Adjusted Pro Forma
Distributions Declared: $ 19,750,073 (s)
============
Pro Forma Wtd. Avg.
Dollars Outstanding... $917,114,983 (t)
============
Pro Forma Cash
Distributions Declared
per $10,000
Investment............ $ 215.35 (u)
============
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 21,919,865(a) $55,049,526 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $21,919,865 $64,106,902 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 2,889,368(a) 6,931,658 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 2,889,368 12,298,325 11,435,228 7,966,916 25,677,829
Operating
Earnings(Losses) Before
Equity in Earnings of
Joint Ventures/Minority
Interests, Gain on Sale
of Properties and
Provision for Losses on
Properties............. $32,778,080 $19,030,497 $51,808,577 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Other Expenses......... 0 0 0 0 0 0
Provision For Loss on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
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
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $19,030,497 $51,182,905 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Units
Outstanding............ n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,573,048 34,221,267 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 34,757 37,372,684 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Calculation of Pro Forma
Distributions Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows.............
Addback Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable......
Addback Pro Forma
Investments in Notes
Receivable............
Adjusted Pro Forma
Distributions Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL
Pro Forma Combined Income Fund Pro Forma
Adjustments APF XII, Ltd. Adjustments
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental and Earned Income..................... $ 0 $55,049,526 $3,885,823 $ 112,628 (j)
Fees......................................... (32,715,768)(b),(c) 3,226,263 0 (79,305)(k)
Interest and Other Income.................... 207,144 (d) 32,221,925 70,227 0
------------ ----------- ---------- ---------
Total Revenue................................ $(32,508,624) $90,497,714 $3,956,050 $ 33,323
Expenses:
General and Administrative................... (4,241,719)(e) 15,939,556 379,164 (86,651)(l),(m)
Management and Advisory Fees................. (4,658,434)(f) 0 41,537 (41,537)(n)
Fees to Related Parties...................... (2,161,897)(g) 858,787 0 0
Interest Expense............................. 0 21,498,589 0 0
State Taxes.................................. 0 567,446 17,653 14,660 (o)
Depreciation--Other.......................... 0 199,157 0 0
Depreciation--Property....................... (340,898)(r) 6,590,760 342,161 144,935 (p)
Amortization................................. 2,136,659 (h) 2,300,660 1,949 0
Transaction Costs............................ 0 157,054 24,282 0
------------ ----------- ---------- ---------
Total Expenses............................... (9,266,289) 48,112,009 806,746 31,407
Operating Earnings(Losses) Before Equity in
Earnings of Joint Ventures/Minority
Interests, Gain on Sale of Properties and
Provision for Losses on Properties........... $(23,242,335) $42,385,705 $3,149,304 $ 1,916
Equity in Earnings of Joint Venture/Minority
Interest.................................... 0 (14,138) 95,142 (27,906)(q)
Gain on Sale of Properties................... 0 0 (104,374) 0
Gain on Securitization....................... 0 3,694,351 0 0
Other Expenses............................... 0 0 0 0
Provision For Loss on Properties............. 0 (611,534) (206,535) 0
------------ ----------- ---------- ---------
Net Earnings (Losses) Before
Benefit/(Provision) for Federal Income
Taxes........................................ (23,242,335) 45,454,384 2,933,537 (25,990)
Benefit/(Provision) for Federal Income
Taxes....................................... 6,898,434 (i) 0 0 0
------------ ----------- ---------- ---------
Net Earnings (Losses)......................... $(16,343,901) $45,454,384 $2,933,537 $ (25,990)
============ =========== ========== =========
Earnings Per Share/Unit....................... $ n/a $ n/a $ 0.65 $ n/a
============ =========== ========== =========
Book Value Per Share/Unit..................... $ n/a $ n/a $ 8.75 $ n/a
============ =========== ========== =========
Dividends Per Share/Unit...................... $ n/a $ n/a $ 0.88 $ n/a
============ =========== ========== =========
Ratio of Earnings to Fixed Charges............ n/a n/a n/a n/a
============ =========== ========== =========
Wtd. Avg. Units Outstanding................... n/a n/a 4,500,000 n/a
============ =========== ========== =========
Wtd. Avg. Shares Outstanding.................. 6,150,000 40,371,267 n/a 2,358,348
============ =========== ========== =========
Shares Outstanding............................ 6,150,000 43,522,684 n/a 2,358,348
============ =========== ========== =========
Calculation of Pro Forma Distributions Declared:
Pro Forma Cash from Operations from Statement
of Cashflows................................
Addback Pro Forma Net Cash Proceeds from
Securitization of Notes Receivable..........
Addback Pro Forma Investments in Notes
Receivable..................................
Adjusted Pro Forma Distributions Declared:
Pro Forma Wtd. Avg. Dollars Outstanding.......
Pro Forma Cash Distributions Declared per
$10,000 Investment...........................
<CAPTION>
Adjusted
Pro Forma
----------------
<S> <C>
Revenues:
Rental and Earned Income..................... $ 59,047,977
Fees......................................... 3,146,958
Interest and Other Income.................... 32,292,152
----------------
Total Revenue................................ $ 94,487,087
Expenses:
General and Administrative................... 16,232,069
Management and Advisory Fees................. 0
Fees to Related Parties...................... 858,787
Interest Expense............................. 21,498,589
State Taxes.................................. 599,759
Depreciation--Other.......................... 199,157
Depreciation--Property....................... 7,077,856
Amortization................................. 2,302,609
Transaction Costs............................ 181,336
----------------
Total Expenses............................... 48,950,162
Operating Earnings(Losses) Before Equity in
Earnings of Joint Ventures/Minority
Interests, Gain on Sale of Properties and
Provision for Losses on Properties........... $ 45,536,925
Equity in Earnings of Joint Venture/Minority
Interest.................................... 53,098
Gain on Sale of Properties................... (104,374)
Gain on Securitization....................... 3,694,351
Other Expenses............................... 0
Provision For Loss on Properties............. (818,069)
----------------
Net Earnings (Losses) Before
Benefit/(Provision) for Federal Income
Taxes........................................ 48,361,931
Benefit/(Provision) for Federal Income
Taxes....................................... 0
----------------
Net Earnings (Losses)......................... $ 48,361,931
================
Earnings Per Share/Unit....................... $ 1.13
================
Book Value Per Share/Unit..................... $ 16.48
================
Dividends Per Share/Unit...................... $ n/a
================
Ratio of Earnings to Fixed Charges............ 3.20x
================
Wtd. Avg. Units Outstanding................... n/a
================
Wtd. Avg. Shares Outstanding.................. 42,729,615 (s)
================
Shares Outstanding............................ 45,881,032
================
Calculation of Pro Forma Distributions Declared:
Pro Forma Cash from Operations from Statement
of Cashflows................................ $ 59,686,001
Addback Pro Forma Net Cash Proceeds from
Securitization of Notes Receivable.......... (265,871,668)
Addback Pro Forma Investments in Notes
Receivable.................................. 288,590,674
----------------
Adjusted Pro Forma Distributions Declared: $ 82,405,007 (t)
================
Pro Forma Wtd. Avg. Dollars Outstanding....... $854,592,300 (u)
================
Pro Forma Cash Distributions Declared per
$10,000 Investment........................... $ 964 (v)
================
</TABLE>
F-27
<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 Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 10,490,297 $ 1,989,688 (a) $ 12,479,985 $ (195,278) $ (73,545) $ (129,428)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 1,548,813 349,465 (b) 1,898,278 39,581 0 0
Amortization expense... 7,368 0 7,368 0 26,238 424,697
Minority interest in
income of consolidated
joint venture......... 7,763 0 7,763 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 23,234 0 23,234 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 215,797 0 215,797 0 0 (73,166)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (82,660) 0 (82,660) (377,933) (242,251) (6,771)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (449,580)
Investment in notes
receivable............ 0 0 0 0 0 (42,571,895)
Collections on notes
receivable............ 0 0 0 0 0 6,417,907
Increase in restricted
cash.................. 0 0 0 0 0 (402,461)
Decrease in due from
related party......... 0 0 0 0 0 55,382
Decrease (increase) in
prepaid expenses...... 27,548 0 27,548 0 1,811 0
Decrease in net
investment in direct
financing leases...... 787,375 0 787,375 0 0 0
Increase in accrued
rental income......... (1,047,421) 0 (1,047,421) 0 0 0
Decrease (increase) in
intangibles and other
assets................ (30,554) 7,942
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 306,277 0 306,277 (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 0 71,853 25,550 0 0
Decrease in accrued
interest.............. 0 0 0 0 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 386,365 0 386,365 0 0 0
Increase (decrease) in
deferred rental
income................ 862,647 0 862,647 0 0 0
------------- ------------ ------------- ----------- --------- -----------
Total adjustments...... 3,114,959 349,465 3,464,424 (1,183,414) (344,708) (37,064,802)
------------- ------------ ------------- ----------- --------- -----------
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)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 0 0 0 0
Additions to land and
buildings on operating
leases................ (77,028,830) (58,749,637)(e) (135,778,467) (31,577) (10,092) 0
Investment in direct
financing leases...... (29,608,346) 0 (29,608,346) 0 0 0
Investment in joint
venture............... (117,662) 0 (117,662) 0 0 0
Aqcuisition of
businesses............
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 134,981
Investment in mortgage
notes receivable...... (1,388,463) 0 (1,388,463) 0 0 0
Collections on mortgage
note receivable....... 75,010 0 75,010 0 0 0
Investment in notes
receivable............ (1,087,483) 0 (1,087,483) 0 0 0
Collection on notes
receivable............ 239,596 0 239,596 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... 0 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------ ------------- ----------- --------- -----------
Net cash provided by
(used in) investing
activities............ (108,916,178) (58,749,637) (167,665,815) (31,577) (10,092) 134,981
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,735 0 210,735 1,288,673 20,572 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,142,237) 0 (1,142,237) 0 0 0
Payment of stock
issuance costs........ (722,001) 0 (722,001) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 36,587,245 33,656,518 (e) 70,243,763 0 0 49,730,934
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (2,385) (10,291,473)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (8,610) 0 (8,610) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0 0
Distributions to
stockholders.......... (14,237,405) 0 (14,237,405) 0 0 0
Other.................. (200,234) 0 (200,234) 0 0 (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
Cash at beginning of
year................... 123,199,837 0 123,199,837 713,308 962,573 2,526,078
------------- ------------ ------------- ----------- --------- -----------
Cash at end of year..... $ 35,796,119 $(22,753,966) $ 13,042,153 $ 591,712 $ 552,415 $ 4,896,688
============= ============ ============= =========== ========= ===========
</TABLE>
F-28
<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>
Historical
Combining CNL
Pro Forma Income Fund Pro Forma Adjusted
Adjustments Combined APF XII, Ltd. Adjustments Pro Forma
----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(1,192,359)(a) $ 10,889,375 $ 862,513 $ (13,517)(a) $ 11,738,371
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 0 1,937,859 84,208 36,234 (b) 2,058,301
Amortization expense... 534,165 (c) 992,468 498 0 992,966
Minority interest in
income of consolidated
joint venture......... 0 7,763 0 0 7,763
Equity in earnings of
joint ventures, net of
distributions......... 0 23,234 (5,815) 6,976 (d) 24,395
Loss (gain) on sale of
land, buildings, and
net investment in
direct
financing leases...... 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 0 142,631 0 0 142,631
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (709,615) (26,722) 0 (736,337)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (449,580) 0 0 (449,580)
Investment in notes
receivable............ 0 (42,571,895) 0 0 (42,571,895)
Collections on notes
receivable............ 0 6,417,907 0 0 6,417,907
Increase in restricted
cash.................. 0 (402,461) 0 0 (402,461)
Decrease in due from
related party......... 0 55,382 0 0 55,382
Decrease (increase) in
prepaid expenses...... 0 29,359 (9,986) 0 19,373
Decrease in net
investment in direct
financing leases...... 0 787,375 46,021 0 833,396
Increase in accrued
rental income......... 0 (1,047,421) (50,071) 0 (1,097,492)
Decrease (increase) in
intangibles and other
assets................ 0 (22,612) 0 0 (22,612)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (768,267) 23,297 0 (744,970)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid
on behalf of the
entity................ 0 97,403 (12,674) 0 84,729
Decrease in accrued
interest.............. 0 (362,877) 0 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 0 386,365 (57,824) 0 328,541
Increase (decrease) in
deferred rental
income................ 0 862,647 0 0 862,647
----------- ------------- ---------- ----------- -------------
Total adjustments...... 534,165 (34,594,335) (9,068) 43,210 (34,560,193)
----------- ------------- ---------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (658,194) (23,704,960) 853,445 29,693 (22,821,822)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 0 0 0
Additions to land and
buildings on operating
leases................ (135,820,136) 0 (135,820,136)
Investment in direct
financing leases...... 0 (29,608,346) 0 0 (29,608,346)
Investment in joint
venture............... 0 (117,662) (124,448) 0 (242,110)
Aqcuisition of
businesses............ (7,712,859)(f) (7,712,859) (2,990,141)(g) (11,221,000)
(518,000)(g)
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 134,981 0 0 134,981
Investment in mortgage
notes receivable...... 0 (1,388,463) 0 0 (1,388,463)
Collections on mortgage
note receivable....... 0 75,010 0 0 75,010
Investment in notes
receivable............ 0 (1,087,483) 0 0 (1,087,483)
Collection on notes
receivable............ 0 239,596 0 0 239,596
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 0 0 0
----------- ------------- ---------- ----------- -------------
Net cash provided by
(used in) investing
activities............ (7,712,859) (175,285,362) (124,448) (3,508,141) (178,917,951)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 1,519,980 0 0 1,519,980
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,142,237) 0 0 (1,142,237)
Payment of stock
issuance costs........ 0 (722,001) 0 0 (722,001)
Proceeds from borrowing
on line of
credit/notes payable.. 0 119,974,697 0 0 119,974,697
Payment on line of
credit/notes payable.. 0 (22,874,147) 0 0 (22,874,147)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (8,610) 0 0 (8,610)
Distributions to
limited partners...... 0 0 (1,091,252) 0 (1,091,252)
Distributions to
stockholders.......... 0 (14,237,405) 0 0 (14,237,405)
Other.................. 0 (209,836) 0 0 (209,836)
----------- ------------- ---------- ----------- -------------
Net cash provided by
(used in) financing
activities............ 0 82,300,441 (1,091,252) 0 81,209,189
Net increase in cash.... (8,371,053) (116,689,881) (362,255) (3,478,448) (120,530,584)
Cash at beginning of
year................... 0 127,401,796 2,362,980 0 129,764,776
----------- ------------- ---------- ----------- -------------
Cash at end of year..... $(8,371,053) $ 10,711,915 $2,000,725 $(3,478,448) $ 9,234,192
=========== ============= ========== =========== =============
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Restated Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 32,152,408 $ 19,030,497 (a) $ 51,182,905 $10,656,379 $(468,133) $ 427,134
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 4,042,290 2,889,368 (b) 6,931,658 119,923 79,234 0
Amortization expense... 11,808 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
leases................ 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) (2,187,652) 0 0 0
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 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 693,372 0 0 0
------------- ------------ ------------- ----------- ---------- -------------
Total adjustments...... 6,963,867 2,889,368 9,853,235 (3,608,563) 316,963 1,610,591
------------- ------------ ------------- ----------- ---------- -------------
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
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (58,749,637)(e) (258,851,304) (381,671) (236,372) 0
Investment in direct
financing leases...... (47,115,435) (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) (974,696) 0 0 0
Acquisition of
businesses............
Purchase of other
investments........... (16,083,055) (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) (6,281,069) 0 0 0
Other.................. 0 0 200,000 0 0
------------- ------------ ------------- ----------- ---------- -------------
Net cash provided
by(used in) investing
activities............ (277,338,756) (58,749,637) (336,088,393) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 33,656,518 (e) 41,348,558 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) (34,073) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0
Distributions to
stockholders.......... (39,449,149) (39,449,149) (9,364,488) 0 0
Other.................. (95,101) (95,101) 0 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
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
============= ============ ============= =========== ========== =============
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL Income Merger
Pro Forma Combined Fund Pro Forma Adjusted
Adjustments APF XII, Ltd. Adjustments Pro Forma
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(16,343,901)(a) $ 45,454,384 $ 2,933,537 $ (25,990)(a) $ 48,361,931
Adjustments to reconcile
net income(loss) to net
cash provided by(used
in) operating
activities:
Depreciation........... (340,898)(b) 6,789,917 342,161 144,935 (b) 7,277,013
Amortization expense... 2,136,659 (c) 4,450,743 1,949 4,452,692
Minority interest in
income of consolidated
joint venture......... 30,156 0 30,156
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 110,673 27,906 (d) 123,139
Loss (gain) on sale of
land, building, net
investment in direct
leases................ 0 104,374 104,374
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 1,009,576 206,535 1,216,111
Gain on
securitization........ (3,356,538) 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 265,871,668 0 265,871,668
Decrease (increase) in
other receivables..... (2,543,413) 185,610 (2,357,803)
Increase in accrued
interest income
included in notes
receivable............ (170,492) 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0
Investment in notes
receivable............ (288,590,674) 0 (288,590,674)
Collections on notes
receivable............ 23,539,641 0 23,539,641
Decrease in restricted
cash.................. 2,504,091 0 2,504,091
Decrease (increase) in
due from related
party................. (953,688) 0 (953,688)
Increase in prepaid
expenses.............. 7,246 178 7,424
Decrease in net
investment in direct
financing leases...... 1,971,634 164,614 2,136,248
Increase in accrued
rental income......... (2,187,652) (28,230) (2,215,882)
Increase in intangibles
and other assets...... (154,351) 0 (154,351)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 846,680 17,530 864,210
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. (133,364) 17,138 (116,226)
Increase in accrued
interest.............. (77,968) 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 60,711 497,554
Decrease in deferred
rental income......... 693,372 0 693,372
------------ ------------ ----------- ----------- ------------
Total adjustments...... 1,795,761 9,967,987 1,183,243 172,841 11,324,071
------------ ------------ ----------- ----------- ------------
Net cash provided
by(used in) operating
activities............ (14,548,140) 55,422,371 4,116,780 146,851 59,686,002
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 483,549 2,869,490
Additions to land and
buildings on operating
leases................ (259,469,347) 0 (259,469,347)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435)
Investment in joint
venture............... (974,696) (115,256) (1,089,952)
Acquisition of
businesses............ (7,712,859)(f) (7,712,859) (2,990,141)(g) (11,221,000)
(518,000)
Purchase of other
investments........... (16,083,055) 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 295,514 0 295,514
Proceeds from retained
interest and
securities, excluding
investment
income................ 212,821 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648)
Collections on mortgage
note receivable....... 291,990 0 291,990
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750)
Collections on
equipment notes
receivable............ 3,046,873 0 3,046,873
Decrease in restricted
cash.................. 0 0 0
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069)
Other.................. 200,000 (3,500) 196,500
------------ ------------ ----------- ----------- ------------
Net cash provided
by(used in) investing
activities............ (7,712,859) (341,927,720) 364,793 (3,508,141) (345,071,068)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 386,592,011 0 386,592,011
Contributions from
limited partners...... 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925)
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 455,102,478 0 455,102,478
Payment on line of
credit/notes payable.. (411,813,826) 0 (411,813,826)
Retirement of shares of
common stock.......... (639,528) 0 (639,528)
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073)
Distributions to
limited partners...... 0 (3,825,008) (3,825,008)
Distributions to
stockholders.......... (48,813,637) 0 (48,813,637)
Other.................. (2,595,088) 0 (2,595,088)
------------ ------------ ----------- ----------- ------------
Net cash provided
by(used in) financing
activities............ 0 338,643,762 (3,825,008) 0 334,818,754
Net increase(decrease)
in cash................ (22,260,999) 52,138,413 656,565 (3,361,290) 49,433,688
Cash at beginning of
year................... 49,829,130 1,706,415 51,535,545
------------ ------------ ----------- ----------- ------------
Cash at end of year..... (22,260,999) 101,967,543 $ 2,362,980 $(3,361,290) $100,969,233
============ ============ =========== =========== ============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of 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 Income Fund. This unaudited pro forma financial
information has been prepared utilizing the historical financial statements of
APF and the historical combined financial information of the Advisor, CNL
Restaurant Financial Services Group and the Income Fund and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, the Advisor, the CNL Restaurant Financial Services Group and the Income
Fund. The Pro Forma Balance Sheet was prepared as if the transactions described
above occurred on 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 Fund 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 Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
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-32
<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 Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Shares Offered............ 3,800,000 2,350,000 2,358,348.15 8,508,348.15
Exchange Value............ $ 20 $ 20 $ 20 $ 20
----------- ----------- ------------ ------------
Share Consideration....... $76,000,000 $47,000,000 $ 47,166,963 $170,166,963
Cash Consideration........ -- -- 518,000 518,000
APF Transaction Costs..... 4,765,669 2,947,190 2,990,141 10,703,000
----------- ----------- ------------ ------------
Total Purchase Price.. $80,765,669 $49,947,190 $ 50,675,104 $181,387,963
=========== =========== ============ ============
Allocation of Purchase
Price:
Net Assets--Historical.... $ 7,141,252 $10,006,878 $ 39,297,102 $ 56,445,232
Purchase Price Adjust-
ments:
Land and buildings on
operating leases....... 9,773,413 9,773,413
Net investment in direct
financing leases....... 2,493,664 2,493,664
Investment in joint ven-
tures.................. 1,728,225 1,728,225
Accrued rental income... (2,574,477) (2,574,477)
Intangibles and other
assets................. (2,792,876) (42,823) (2,835,699)
Goodwill*............... 42,733,188 -- 42,733,188
Excess purchase price... 73,624,417 -- -- 73,624,417
----------- ----------- ------------ ------------
Total Allocation...... $80,765,669 $49,947,190 $ 50,675,104 $181,387,963
=========== =========== ============ ============
</TABLE>
- --------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $10,703,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess purchase
price paid for the Advisor to a related party of $73,624,417 was expensed at
March 31, 1999 because the Advisor has not been deemed to qualify as a
"business" for purposes of applying APB Opinion No. 16, "Business
Combinations". Goodwill of 42,733,188 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 Earn-
ings.......... 3,277,060
Accumulated
distributions
in excess of
earnings...... 73,624,417
Goodwill for
CFC (Intangi-
bles and other
assets)....... 42,733,188
CFC/CFS Org
Costs/Other
Assets...... 2,792,876
Cash to pay
APF transac-
tion costs.. 7,712,859
APF Common
Stock....... 61,500
APF APIC..... 122,938,500
(To record ac-
quisition of
CFA, CFS and
CFC)
2.Partners Capi-
tal............. 39,297,102
Land and build-
ings on oper-
ating leases.. 9,773,413
Net investment
in direct fi-
nancing
leases........ 2,493,664
Investment in
joint ven-
tures......... 1,728,225
Accrued
rental in-
come........ 2,574,477
Intangibles
and other
assets...... 42,823
Cash to pay
APF Transac-
tion costs.. 2,990,141
Cash consid-
eration to
Income
Fund........ 518,000
APF Common
Stock....... 23,583
APF APIC..... 47,143,380
(To record ac-
quisition of
Income Fund)
</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 Income Fund of $11,351 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, 1999.
(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.
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates......................... $ (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 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
</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>
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $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)
<TABLE>
<S> <C>
Amortization of goodwill..................................... $534,165
</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 $28,157 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................. $(10,530)
Reimbursement of administrative costs....................... (18,396)
--------
$(28,926)
========
</TABLE>
(l) Represents the elimination of $18,396 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $11,260 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 $10,530 in management fees by the
Income Fund to the Advisor.
(o) Represents additional state income taxes of $9,724 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through May 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 Fund 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 $36,234 as a
result of adjusting the historical basis of the real estate wholly
owned by the Income Fund to fair value as a result of accounting
for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings is
being depreciated using the straight-line method over the remaining
useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $6,976 as a result of adjusting the historical basis of the real
estate owned by the Income Fund, indirectly through joint venture
or tenancy in common arrangements, to fair value as a result of
accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 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.
(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.
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................ $ (1,773,406)
Secured equipment lease fees............................ (54,998)
Advisory fees........................................... (305,030)
Reimbursement of administrative costs................... (408,762)
Acquisition fees........................................ (21,794,386)
Underwriting fees....................................... (388,491)
Administrative, executive and guarantee fees............ (1,233,043)
Servicing fees.......................................... (1,570,331)
Development fees........................................ (229,153)
Management fees......................................... (1,851,004)
------------
Total................................................. $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the year ended
December 31, 1998, which were deferred for pro forma purposes as
described in 5(II)(c). These deferred loan origination fees are
being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income.............................................. $ 207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C> <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.
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4)
<TABLE>
<S> <C>
Amortization of goodwill................................... $2,136,659
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $112,628 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................. $(41,537)
Reimbursement of administrative costs....................... (37,768)
--------
$(79,305)
========
</TABLE>
(l) Represents the elimination of $37,768 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $48,883 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $41,537 in management fees by the
Income Fund to the Advisor.
(o) Represents additional state income taxes of $14,660 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1998 through 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 Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
(p) Represents an increase in depreciation expense of $144,935 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Income Fund through joint venture or tenancy in
common arrangements with affiliates or unrelated third parties, to
fair value as a result by the Income Fund to fair value as a result
of accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $27,906 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(r) 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 from the pro forma statement of cash flows.
(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.
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CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Concluded)
(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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non-Cash Investing Activites:
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B)
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the use of amounts borrowed under APF's credit facility
and the use of cash to 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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non-Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
F-41
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund XII, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund XII, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
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(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
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Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
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Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among CNL American Properties Fund, Inc., a
Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware limited
partnership (the "Operating Partnership"), CNL APF GP Corp., a Delaware
corporation (the "OP General Partner"), CNL Income Fund XII, Ltd., a Florida
limited partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr.,
and CNL Realty Corporation, a Florida corporation (together with Messrs. Borne
and Seneff, the "General Partners"). APF, the Operating Partnership, the OP
General Partner, the Fund and the General Partners are referred to
collectively herein as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund
will be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. AMENDMENTS TO MERGER AGREEMENT
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its
entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote
against the Merger and affirmatively elect the note option, such limited
partners shall be entitled to receive, in lieu of the Share
Consideration, notes (the "Notes") in the aggregate amount equal to 97%
of the value (based on the Exchange Value as defined in the Registration
Statement) of the Share Consideration such Dissenting Partners would
have otherwise received had such partners not elected to receive the
Notes (the "Note Option"). The Notes will mature on the fifth
anniversary of the Closing Date and will bear interest at a fixed rate
equal to seven percent. The aggregate Share Consideration shall be
reduced on a one-for-basis for all APF Shares otherwise distributable to
Dissenting Partners had such Dissenting Partners not elected the Note
Option."
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
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1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to Dissenting
Limited Partners shall not have exceeded 15% of the value of the
Share Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. GENERAL
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will
constitute one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of
Florida or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Florida.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
_________________________________
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
_________________________________
By: Robert A. Bourne
Its: President
CNL APF GP CORP.
/s/ Robert A. Bourne
_________________________________
By: Robert A. Bourne
Its: President
CNL INCOME FUND IX, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
_________________________________
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
_________________________________
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
_________________________________
Robert A. Bourne, as General
Partner
/s/ James M. Seneff, Jr.
_________________________________
James M. Seneff, Jr., as General
Partner
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund XII, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
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"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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<PAGE>
"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 4,768,496 fully paid and nonassessable APF Common
Shares (2,384,248 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $42,752,014, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 56,231,504 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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<PAGE>
the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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<PAGE>
APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 4,500,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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<PAGE>
Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $4,768,496 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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<PAGE>
ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $476,850 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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<PAGE>
14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
B-35
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
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 XII, 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
B-36
<PAGE>
Appendix C
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF LIMITED PARTNERSHIP
OF
CNL INCOME FUND XII, LTD.
- --------------------------------------------------------------------------------
(Insert name currently on file with Florida Dept. of State)
Pursuant to the provisions of section 620.109, Florida Statutes, this
Florida limited partnership, whose certificate was filed with the Florida
Department of State on August 20, 1991, adopts the following certificate of
amendment to its certificate of limited partnership:
FIRST: Amendment(s): (indicate article number(s) being amended, added, or
deleted)
Article XX, Section 21.5 is deleted in its entirety, and all cross
references to such section are deleted in their entirety.
SECOND: This certificate of amendment shall be effective at the time of its
filing with the Florida Department of State.
THIRD: Signature(s)
Signature of current general partner(s):
_____________________________________
James M. Seneff, Jr.
_____________________________________
Robert A. Bourne
CNL Realty Corporation
By:__________________________________
Name:
Signature(s) of new general partner(s), if applicable: N/A
C-1
<PAGE>
Appendix D
[FORM OF OPINION]
, 1999
James M. Seneff, Jr.
Robert A. Bourne
400 East South Street
Orlando, Florida 32801
Gentlemen:
We have acted as counsel to CNL Income Fund XII, Ltd., a Florida limited
partnership (the "Partnership") of which you are the general partners (the
"General Partners"), in connection with the proposed amendment (the "Proposed
Amendment") to the Amended and Restated Agreement of Limited Partnership of CNL
Income Fund XII, Ltd. (the "Partnership Agreement"). The Partnership Agreement
requires that in connection with any proposed amendment to the Partnership
Agreement (other than ministerial amendments and those amendments dealing with
the transfer of a limited partner's partnership interest or the admission of
substituted or additional limited partners), the General Partners must obtain
an opinion of counsel concerning whether such proposed amendment would result
in changing the Partnership to a general partnership. The Proposed Amendment
would delete the provision in the Partnership Agreement that prohibits the
Partnership from participating in any transaction involving (i) the
acquisition, merger, conversion, or consolidation, either directly or
indirectly, of the Partnership, and (ii) the issuance of securities of any
other partnership, real estate investment trust, corporation trust or other
entity that would be created or would survive after the successful completion
of such transaction.
This opinion is furnished pursuant to the Partnership Agreement. In
rendering our opinion, we have examined and relied on the Partnership
Agreement, the Proposed Amendment, and the Certificate of Limited Partnership
of the Partnership. We have, in addition, made such other inquiries of fact and
examinations of law as we have deemed necessary for purposes of rendering this
opinion.
We are members of the Bar of the State of Florida and do not hold ourselves
out as being conversant with the laws of any jurisdiction other than those of
the State of Florida and are expressing no opinion as to the laws of any
jurisdiction other than those of the State of Florida and our opinion is so
limited.
In rendering the opinion set forth below, we have assumed: the genuineness
of all signatures on records, certificates, instruments, agreements and other
documents submitted to us for examination; the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, photostatic, facsimile, reproduced, or
conformed copies and the authenticity of the originals of such latter
documents; the accuracy and completeness of all factual representations made in
the above-referenced documents; and the legal capacity of all natural persons.
Based upon the foregoing and subject to the limitations and qualifications
hereinafter set forth, we are of the opinion that the Proposed Amendment to the
Partnership Agreement would not result in changing the Partnership to a general
partnership.
This opinion letter is based upon and limited to laws of the State of
Florida as in effect on the date of this letter and to our current knowledge of
facts in existence as of the date of this letter and material to the opinions
expressed in this letter. This opinion letter is rendered as of the date
hereof, and does not purport to analyze, evaluate or consider the legal effect
of any event, legal or factual, occurring after such date that may alter the
validity, effect or contents of this opinion, and we assume no obligation to
update the opinion set forth herein.
<PAGE>
This opinion letter is limited to the matters expressly set forth in this
letter, and no other statement or opinions should be inferred beyond the
matters expressly stated.
Except as agreed by us in writing, our opinion is solely for the benefit of
the addressees shown on the first page hereof and the limited partners of the
Partnership and may be relied upon by such parties solely for the purposes for
which it is being furnished. Without our prior written consent, this opinion
letter may not be used, circulated, quoted or otherwise referred to for any
purpose except as stated herein.
Very truly yours,
Baker & Hostetler LLP
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND XIII, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund XIII, Ltd., which we refer to as the Income Fund, for the purpose
of enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly-owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999, and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties on a triple-net
basis. APF has the ability to offer a complete range of restaurant property
services to operators of national and regional restaurant chains, from triple-
net leasing and mortgage financing to site selection, construction management
and build-to-suit development. If APF acquires all of the Income Funds in the
Acquisition, APF expects to have total assets of approximately $1.5 billion at
the time of the consummation of the Acquisition and will be one of the largest
triple-net lease REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 1,943,093 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is uncertain because there is no
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<PAGE>
established trading market. Upon the consummation of the Acquisition, the APF
Shares will be listed for trading on the NYSE. We do not know the value at
which an APF Share will trade on the NYSE upon listing. It is possible that the
APF Shares will trade at prices substantially below the exchange value. APF
has, however, recently sold $750 million of APF Shares through three public
offerings. In each offering, the offering price per APF Share, after giving
effect to the one-for-two stock split, equaled the exchange value. The offering
price was determined by APF based upon the estimated costs of investing in
restaurant properties and making mortgage loans, the fees to be paid to CNL
Fund Advisors, Inc. and its affiliates, as well as fees to third parties and
the expenses of the offerings. At March 31, 1999, APF has invested all of the
net offering proceeds to acquire restaurant properties, to make mortgage loans
and to pay fees and other expenses.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the Acquisition?
There are a number of material risks and considerations that you should
consider, including:
. We are uncertain as to the value at which APF Shares will trade
following listing.
. We have material conflicts in light of our being both general partners
of the Income Funds and members of APF's Board of Directors.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. As stated below, the Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote against the
Acquisition.
Did you receive a fairness opinion in connection with APF's acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
with respect to the fairness, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the colored
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's acquisition of your
Income Fund. If you prefer, you may instead vote by telephone, following the
instructions on your consent form. If you sign and send in your consent form
and do not indicate how you want to vote, your consent form will be
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<PAGE>
counted as a vote "For" the Acquisition. If you do not vote or you abstain from
voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2004 in an amount equal to 97% of your portion of the APF Share consideration
that would otherwise have been paid to your Income Fund, based on the exchange
value. Please note that you may only receive the notes if you vote "Against"
the Acquisition and you elect to receive notes on your consent form. You will
receive APF Shares if your Income Fund elects to be acquired in the Acquisition
and you vote "For" the Acquisition, or you vote "Against" the Acquisition and
do not affirmatively select the notes option on your consent form. In addition,
if Limited Partners in your Income Fund elect to receive notes in an amount
greater than 15% of the estimated value of APF Shares, based on the exchange
value, to be paid to your Income Fund, then APF has the right to decline to
acquire your Income Fund. The notes will not be listed on any exchange or
automated quotation system, and a market for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
the tax that you must pay generally will be based on the difference between the
value of the APF Shares you receive and the tax basis of your units. If you
elect to receive notes, your tax will be based upon your allocable share of the
gain which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Some of
the gain may be subject to the 25% rate of tax applicable to certain types of
real property gain.
We urge you to consult with your tax advisor to evaluate the taxes that will
be incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $660. To review
the tax consequences to the Limited Partners of the Income Funds in greater
detail, see pages 180 through 194 of the consent solicitation and "Federal
Income Tax Considerations" in this supplement.
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<PAGE>
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds acquired by
APF may be differently constructed, located in a different geographic area or
of a different restaurant chain than the restaurant properties owned by your
Income Fund. Because the market for real estate may vary from one region of the
country to another, the change in geographic diversity may expose you to
different and greater risks than those to which you are presently exposed. For
geographic information regarding APF's and the Income Funds' restaurant
properties, see "APF's Business and The Restaurant Properties--Business
Objectives and Strategies" and "--The Restaurant Properties--General" and
"Business of the Income Funds--Description of Restaurant Properties" in the
consent solicitation.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund. This description is qualified in its entirety
by the more detailed discussion in the section entitled "Risk Factors"
contained in the consent solicitation.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease below the exchange value upon listing.
Your Income Fund will be receiving 1,943,093 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices substantially below
the exchange value or the historical per share book value of the assets of APF.
The APF Shares have been approved for listing on the NYSE, subject to official
notice of issuance. Prior to listing, the existing APF stockholders have not
had an active trading market in which they could sell their APF Shares.
Additionally, any Limited Partners of the Income Funds who become APF
stockholders as a result of the Acquisition, will have transformed their
investment in non-tradable units into an investment in freely tradable APF
Shares. Consequently, some of these stockholders may choose to sell their APF
Shares upon listing at a time when demand for APF Shares may be relatively low.
The market price of the APF Shares may be volatile after the Acquisition, and
the APF Shares could trade at prices substantially less than the exchange value
as a result of increased selling activity following the issuance of the APF
Shares, the interest level of investors in purchasing the APF Shares after the
Acquisition and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund made $850 in distributions, per $10,000 investment to you. While
historically, APF has made distributions equal to 7.625% per APF Share, based
on the exchange value, we cannot be sure that APF will be able to maintain this
level of distributions in the future. In the event that APF is unable to
maintain this level of distributions in the future, your distributions per
$10,000 investment may decrease substantially after the Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have two material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL
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<PAGE>
Realty Corp., an entity whose sole stockholders are Messrs. Seneff and Bourne,
are the three general partners of the Income Funds. As Board members of APF,
Messrs. Seneff and Bourne have a different interest in the completion of the
Acquisition which may conflict with your interest as a Limited Partner of the
Income Fund or with their own positions as the general partners of your Income
Fund. Second, while we will not receive any APF Shares as a result of APF's
Acquisition of your Income Fund, we, as general partners of your Income Fund,
may be required to pay all or a substantial portion of the Acquisition costs
allocated to your Income Fund to the extent that you or other Limited Partners
of your Income Fund vote against the Acquisition. For additional information
regarding the Acquisition costs allocated to your Income Fund, see "Comparison
of Alternative Effect on Financial Condition and Results of Operations"
contained in this supplement.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own and lease on a triple-net basis, on the date that the Acquisition
is consummated, assuming only your Income Fund was acquired as of March 31,
1999, 560 restaurant properties. The risks inherent in investing in an
operating company such as APF include that APF may invest in new restaurant
properties that are not as profitable as APF anticipated, may incur substantial
indebtedness to make future acquisitions of restaurant properties which it may
be unable to repay and may make mortgage loans to prospective operators of
national and regional restaurant chains which may not have the ability to
repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through sale of your APF Shares, not from
liquidation proceeds from restaurant properties. Continuation of your Income
Fund would, on the other hand, permit you eventually to receive liquidation
proceeds, if any, from the sale of the Income Fund's restaurant properties, and
your share of these sale proceeds could be higher than the amount realized from
the sale of your APF Shares or from the combination of cash paid to and
payments on any notes if you elect to receive the notes.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default 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
S-5
<PAGE>
received the net proceeds paid to the trust from the sale of the trust
certificates. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to Fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
March 31, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.62x and its ratio of debt-to-total assets was
28.02%. If only your Income Fund were acquired as of that date, APF's debt
service ratio would have been 3.78x and its ratio of debt-to-total assets would
have been 27.01%. Up through the time immediately prior to the consummation of
the Acquisition, as a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former limited partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
S-6
<PAGE>
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgages. APF
typically does not require that a third party guarantee the obligations of the
tenant or the borrower. The ability of the tenants or borrowers to pay their
obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to: (1)
national, regional and local economic conditions which may be adversely
affected by industry slowdowns, employer relocations, prevailing employment
conditions and other factors, and which may reduce consumer demand for the
products offered by APF's customers; (2) local real estate conditions; (3)
changes or weaknesses in specific industry segments; (4) perceptions by
prospective customers of the safety, convenience, services and attractiveness
of the restaurant chain; (5) changes in demographics, consumer tastes and
traffic patterns; (6) the ability to obtain and retain capable management; (7)
changes in laws, building codes, similar ordinances and other legal
requirements, including laws increasing the potential liability for
environmental conditions existing on properties; (8) the inability of a
particular restaurant chain's computer system, or that of its franchisor or
vendors, to adequately address Year 2000 issues; (9) increases in operating
expenses; and (10) increases in minimum wages, taxes, including income,
service, real estate and other taxes, or mandatory employee benefits.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as a stockholder, would be reduced substantially for
each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to certain adjustments that are unique to REITs, a REIT generally
must distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
S-7
<PAGE>
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
For a more detailed discussion of the risks associated with the Acquisition,
see "Risk Factors" in the consent solicitation.
CONSIDERATION PAID TO INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth information regarding the estimated value of
the consideration that your Income Fund will receive in the Acquisition. The
APF Shares payable to your Income Fund will not change if APF acquires fewer
than all of the Income Funds in the Acquisition. This data assumes that none of
the Limited Partners of your Income Fund have elected to receive the notes. You
should note that the APF Shares may trade at prices substantially below the
exchange value upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited Estimated
Partner Value of
Original Investments APF Shares
Limited Less Any per
Partner Distributions Number of Estimated Estimated Average
Investments of Net Sales APF Value of Value of $10,000
Less Any Proceeds per Shares APF Shares APF Shares Original
Distributions $10,000 Offered Payable to Estimated after Limited
of Net Sales Original to Income Income Acquisition Acquisition Partner
Proceeds Investment(1) Fund Fund Expenses Expenses Investment
- ------------- ------------- --------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
$40,000,000 $10,000 1,943,093 $38,861,860 $441,000 $38,420,860 $9,605
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2004. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2004. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest. For more detailed information, see "The Acquisition" and
"Description of the Notes" in the consent solicitation.
S-8
<PAGE>
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1)................................................... $ 22,348
Appraisals and Valuation(2)..................................... 7,750
Fairness Opinions(3)............................................ 30,000
Solicitation Fees(4)............................................ 16,679
Printing & Mailing(5)........................................... 108,936
Accounting and Other Fees(6).................................... 50,946
--------
Subtotal.................................................... 236,659
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(7)....................... 93,742
Legal Closing Fees(8)........................................... 46,303
Partnership Liquidation Costs(9)................................ 64,296
--------
Subtotal.................................................... 204,341
--------
Total........................................................... $441,000
========
</TABLE>
--------
(1) Aggregate legal fees to be incurred by all of the Income
Funds in connection with the Acquisition is estimated to
be $312,063. Your Income Fund's pro-rata portion of these
fees was determined based on the percentage of the value
of the APF Share consideration payable to your Income
Fund, based on the exchange value, to the total value of
the APF Share consideration payable to all of the Income
Funds, based on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by
all of the Income Funds in connection with the Acquisition
were $105,420. Your Income Fund's pro-rata portion of
these fees was determined based on number of restaurant
properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg
Mason and incurred a fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to
be $249,626. Your Income Fund's pro-rata portion of these
fees was determined based on the number of Limited
Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the
Income Funds in connection with the Acquisition is
estimated to be $1,610,399. Your Income Fund's pro-rata
portion of these fees was determined based on the number
of Limited Partners in your Income Fund.
(6) Aggregate accounting and other fees to be incurred by the
Income Funds in connection with the Acquisition is
estimated to be $683,904. Your Income Fund's pro-rata
portion of these fees was determined based on the
percentage of your Income Fund's total assets as of March
31, 1999 to the total assets of all of the Income Funds as
of March 31, 1999.
S-9
<PAGE>
(7) Aggregate title, transfer tax and recording fees to be
incurred by all of the Income Funds in connection with the
Acquisition is estimated to be $1,312,808. Your Income
Fund's pro-rata portion of these fees was determined based
on the percentage of the value of the APF Share
consideration payable to your Income Fund, based on the
exchange value, to the total value of the APF Share
consideration payable to all of the Income Funds, based on
the exchange value.
(8) Aggregate legal closing fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to
be $648,454. Your Income Fund's pro-rata portion of these
fees was determined based on the percentage of your Income
Fund's total assets as of March 31, 1999 to the total
assets of all of the Income Funds as of March 31, 1999.
(9) Aggregate partnership liquidation costs to be incurred by
all of the Income Funds in connection with the Acquisition
is estimated to be $895,326. Your Income Fund's pro-rata
portion of these costs was determined based on the
percentage of the value of the APF Share consideration
payable to your Income Fund, based on the exchange value,
to the total value of the APF Share consideration payable
to all of the Income Funds, based on the exchange value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 80% or more in value of your Income Fund's
restaurant properties acquired within two years of the initial date of the
prospectus (March 17, 1993). Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding of units.
Required Amendment to the Partnership Agreement
Your Income Fund's partnership agreement includes one provision that may
prevent the successful completion of APF's Acquisition of your Income Fund.
This provision must be amended in order to successfully complete the
Acquisition. Therefore, if you vote "For" the Acquisition, you will also be
asked to vote in favor of this amendment. The proposed amendment is summarized
below:
. Amendment to Roll-Up Prohibition. Article 21 of the partnership agreement
currently provides that your Income Fund may not participate in any
transaction involving (i) the acquisition, merger, conversion or
consolidation, either directly or indirectly, of your Income Fund, and
(ii) the issuance of securities of any other partnership, real estate
investment trust, corporation, trust or other entity that would be
created or would survive after the successful completion of such
transaction.
If the Limited Partners holding a majority of the units approve this
amendment to your Income Fund's partnership agreement your Income Fund, Article
21 will be deleted in its entirety.
S-10
<PAGE>
Partnership Agreement Amendment Procedures
Pursuant to Article 13 of your Income Fund's partnership agreement, we may
propose amendments to the partnership agreement. Article 13 of the partnership
agreement requires that we furnish you with a verbatim statement of the
proposed amendment, which is attached to this supplement as Appendix C, and to
include an opinion of our counsel regarding whether the proposed amendment
would result in changing your Income Fund to a general partnership, changing
our liability or your liability, or allowing you to take part in the control or
management of your Income Fund. The form of opinion of Baker & Hostetler LLP is
attached to this supplement as Appendix D.
Consequence of Failure to Approve the Acquisition or the Amendments
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition and the proposed
amendment to the partnership agreement, the Acquisition may not be consummated
under the terms of the partnership agreement. In such event, we plan to
continue to operate your Income Fund as a going concern and to eventually
dispose of your Income Fund's restaurant properties approximately 7 to 12 years
after they were acquired, or as soon thereafter if, in our opinion, market
conditions permit, as contemplated by the terms of the partnership agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at
. We and members of APF's management
intend to solicit actively your support for the Acquisition and would like to
use the special meeting to answer questions about the Acquisition and the
solicitation materials, and to explain in person our reasons for recommending
that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent, constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain their votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning on attending the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about
, 1999 and will continue until the later of (a) , 1999 a
date not less than 60 calendar days from the initial delivery of the
solicitation materials, or (b) such later date as we may select and as to which
we give you notice. At our discretion, we may elect to extend the solicitation
period. Under no circumstances will the solicitation period be extended beyond
March 31, 2000. Any consent form received by Corporate Election Services prior
to 5:00 p.m., Eastern time, on the last day of the solicitation
S-11
<PAGE>
period will be effective provided that such consent form has been properly
completed and signed. If you fail to return a signed consent form by the end of
the solicitation period, your units will be counted as voting "Against" the
Acquisition of your Income Fund and you will receive APF Shares if your Income
Fund is acquired. If you prefer, you may instead vote by telephone according to
the instructions on your consent form.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
S-12
<PAGE>
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the quarter
ended March 31, 1999, the aggregate amounts accrued or paid by your Income Fund
to us are shown below under "Historical Distributions Paid to the General
Partners and Affiliates" and the estimated amounts of compensation that would
have been paid had the Acquisition been in effect for the periods presented,
are shown below under "Pro Forma Distributions to Be Paid to the General
Partners Following the Acquisition":
<TABLE>
<CAPTION>
Quarter
Year Ended December 31, Ended
-------------------------- March 31,
1996 1997 1998 1999
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the
General Partners and Affiliates:
General Partner Distributions.......... -- -- -- --
Accounting and Administrative Services. $ 91,272 $ 87,322 $ 98,719 $25,365
Broker/Dealer Commissions..............
Property Management Fees............... 35,675 34,321 35,257 8,596
Due Diligence and Marketing Support
Fee................................... -- -- -- --
Acquisition Fees....................... -- -- -- --
Asset Management Fees.................. -- -- -- --
Real Estate Disposition Fees(1)........ -- -- -- --
-------- -------- -------- -------
Total historical..................... $126,947 $121,643 $133,976 $33,961
Pro Forma Distributions to Be Paid to the
General Partners Following the
Acquisition:
Cash Distributions on APF Shares....... -- -- -- --
Salary Compensation.................... -- -- -- --
-------- -------- -------- -------
Total pro forma...................... -- -- -- --
======== ======== ======== =======
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to certain minimum
returns to the Limited Partners. To date, no such fees have been paid since
the required minimum returns have not been made to the Limited Partners.
S-13
<PAGE>
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
contained herein under the caption "Financial Statements" and in the consent
solicitation under the caption "Summary--Our Reasons for Supporting the
Acquisition--Prices for Income Fund Units."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31, 1999
------------------------ --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income........ $756 $821 $800 $751 $617 $166 $122
Distributions from Sales of
Properties...................... -- -- -- -- -- -- --
Distributions from Return of
Capital(1)...................... -- 23 50 99 233 47 86
---- ---- ---- ---- ---- ---- ----
Total........................ $756 $844 $850 $850 $850 $213 $208
==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from certain non-cash
items. This amount is not required to be presented as a return of capital
except for purposes of this table, and the Income Fund has not treated this
amount as a return of capital for any other purpose.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses during 1999. Thus, the pro forma information regarding
the distributions to APF stockholders for the quarter ended March 31, 1999 is
not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the Acquisition
with those of several alternatives, the Acquisition is more economically
attractive to you and the other Limited Partners than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of outstanding units of your Income
S-14
<PAGE>
Fund and is subject to certain closing conditions. Second, if your Income Fund
is acquired, all Limited Partners of your Income Fund who vote against the
Acquisition will be given the option of receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others, that we will be relieved
from certain ongoing liabilities with respect to the Income Funds if it is
acquired by APF. For a further discussion of the conflicts of interest and
potential benefits of the Acquisition to us, see "Conflicts of Interest" below.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the values of the
consideration which would have been received by you and the other Limited
Partners in alternative transactions and concluded that the Acquisition is fair
based on such comparison. We believe the Acquisition is the best way to
maximize the return on your investment because of your ability to participate
in the potential appreciation of APF Shares. Since the investment in your
Income Fund is an investment in a static portfolio due to the restrictions
contained in your Income Fund's partnership agreement and limited capital
resources, your investments have less of an opportunity to appreciate. Because
APF is a growth-oriented operating company you will have the opportunity, as an
APF stockholder, to participate in APF's future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinions of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinions of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., an affiliate of CNL Group, Inc., and (3) Valuation
Associates has previously performed valuation appraisals for APF. See "Reports,
Opinions and Appraisals" in the consent solicitation.
On rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to, any other
aspect of the Acquisition, including:
.the value or fairness of the notes;
S-15
<PAGE>
. the prices at which the APF Shares may trade following the Acquisition or
the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Legg Mason's opinion also does not compare the relative merits of the
Acquisition with those of any other transaction or business strategy which were
or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares will exceed the going concern value and
liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Net Book Value of the Income Fund. We calculated the book value of your
Income Fund under generally accepted accounting principles, or GAAP, as of
March 31, 1999 per average $10,000 original investment. Since the calculation
of the book value was done on a GAAP basis, it is primarily based on historical
cost and, therefore, it is not indicative of the true fair market value of your
Income Fund. This figure was compared to three other figures:
(1) the value of the Income Fund if it commenced an orderly liquidation of
its investment portfolio on December 31, 1998,
(2) the value of the Income Fund if it continued to operate in accordance
with its existing partnership agreement and business plans, and
(3) the estimated value of the APF Shares, based on the exchange value,
paid to each Income Fund per average $10,000 invested.
S-16
<PAGE>
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated
Value of APF
Original Shares
Limited Partner per Average
Investments Less GAAP Going $10,000 Original
any Distributions Book Liquidation Concern Limited Partner
of Sales Proceeds(/1/) Value Value(/2/) Value(/2/) Investment
---------------------- ------ ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
CNL Income Fund XIII,
Ltd. .................. 10,000 $8,392 $8,672 $9,571 $9,605
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
(2) Liquidation and going concern values were based on appraisals prepared by
Valuation Associates. For a complete description of the methodologies
employed by Valuation Associates, see "Reports, Opinions and Appraisals" in
the consent solicitation.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have contractual
obligations pursuant to your Income Fund's partnership agreement as well as
state law to assess whether the terms of the Acquisition are fair and equitable
to the Limited Partners of your Income Fund without regard to whether the
Acquisition is fair and equitable to any of the other participants, including
the Limited Partners in other Income Funds. James M. Seneff, Jr. and Robert A.
Bourne act as the individual general partners of all of the Income Funds and
also as members of the Board of Directors of APF. While Messrs. Seneff and
Bourne have sought faithfully to discharge their obligations to your Income
Fund, there is an inherent conflict of interest in serving, directly or
indirectly, in a similar capacity with respect to your Income Fund and also on
APF's Board of Directors.
Lack of Independent Representation
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We have
been the parties responsible for structuring all the terms and conditions of
the Acquisition. Legal counsel engaged to assist with the preparation of the
documentation for the Acquisition, including this consent solicitation, was
engaged by us and did not serve, or purport to serve, as legal counsel for the
Income Funds or Limited Partners. If an independent representative had been
retained for the Income Funds, the terms of the Acquisition may have been
different and possibly more favorable to the Limited Partners. In particular,
had separate representation for each of the Income Funds been arranged by us,
issues unique to the value of each of the specific Income Funds might have been
highlighted or received greater attention, resulting in adjustments to the
value assigned to the assets of such Income Funds and increasing the number of
APF Shares or notes that would be allocable to such Income Fund if acquired in
the Acquisition.
S-17
<PAGE>
Benefits to General Partners
As a result of the Acquisition assuming only your Income Fund is acquired,
we are expected to receive two material benefits. These benefits include:
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr. Seneff
serving as Chairman of APF and Mr. Bourne serving as Vice Chairman.
Furthermore, they will be entitled to receive performance-based
incentives, including stock options, under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of the Income Funds, we are legally liable for all of
Income Funds liabilities to the extent that the Income Funds are unable
to satisfy such liabilities. Because the partnership agreement for each
Income Fund prohibits the Income Funds from incurring indebtedness, the
only liabilities the Income Funds have are liabilities with respect to
their ongoing business operations. In the event that one or more Income
Funds are acquired by APF, we would be relieved of our legal obligation
to satisfy the liabilities of the acquired Income Fund or Income Funds.
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Certain Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund. If
your Income Fund is acquired by APF, and you have voted "For" the Acquisition,
you will receive APF Shares. If you have voted "Against" the Acquisition but
your Income Fund is acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under certain circumstances, even
if APF were to make the same level of distributions as your Income Fund, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income
S-18
<PAGE>
will generally be ordinary dividend income to you and will be classified as
portfolio income under the passive loss rules, except with respect to capital
gains dividends, discussed below. Furthermore, if APF incurs a taxable loss,
the loss will not be passed through to you. For certain other differences
attributable to APF's status as a REIT, see "--Taxation of APF" and "--Taxation
of Stockholders--Taxable Domestic Stockholders" in the consent solicitation.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF, the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain and loss based on the
exchange value, for an average $10,000 original Limited Partner investment in
your Income Fund, is set forth in the table below for those Limited Partners
subject to federal income taxation.
<TABLE>
<CAPTION>
Estimated
Gain/(Loss) per
Average $10,000
Original
Limited Partner
Investment(/1/)
---------------
<S> <C>
CNL Income Fund XIII, Ltd. ..................................... $660
</TABLE>
- --------
(1) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be significantly below the exchange value.
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one more individuals or entities in exchange for the stock of that corporation,
and (2) immediately after the exchange, such individuals or entities are in
control of the corporation. For purposes of section 351(a), control is defined
as the ownership of stock possessing at least 80 percent of the total combined
voting power of all classes of stock entitled to vote and at least 80 percent
of the total number of shares of all other classes of stock of the corporation.
APF has represented to Shaw Pittman, APF's tax counsel, that, following the
Acquisition, the Limited Partners of the Income Funds will not own stock
possessing at least 80 percent of the total combined voting power of all
classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between;
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if
any, assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares, and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2004, the
acquisition of your
S-19
<PAGE>
Income Fund's assets, in part, in exchange for notes will be reported under the
installment sales method and a portion of your Income Fund's gain may be
deferred under the "installment sale" rules. Pursuant to this method, and
assuming that none of the principal amount of the notes is collected in the
year of the Acquisition, the amount of gain recognized by your Income Fund in
the year of the Acquisition will be equal to the value of the APF Shares
received by your Income Fund multiplied by the ratio that the gross profit
realized by your Income Fund in the Acquisition bears to the total contract
price for your Income Fund's assets. To the extent your Income Fund realizes
depreciation recapture income under section 1245 or section 1250 of the Code,
the recapture income will also be recognized by your Income Fund in the year of
the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses that
you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the notes may recognize gain in the year of the
Acquisition despite the fact that they will not receive cash with which to pay
the tax on the gain. Such Limited Partners will adjust the basis of the notes
as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes. See "--Tax Consequences of Liquidation and
Termination of Your Income Fund" below.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition, including gain or loss resulting from the Acquisition. If
your taxable year is not the calendar year, you could be required to recognize
as income in a single taxable year your share of your Income Fund's income
attributable to more than one of its taxable years.
S-20
<PAGE>
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units. Your holding period for
the notes for purposes of determining capital gain or loss from the disposition
of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17) or
(20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
For a discussion of the taxation of APF, see "Federal Income Tax
Considerations--Taxation of APF" in the consent solicitation.
S-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 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 2,307,364 1,391,466 8,137 (2,450,663)(b),(c)
Interest and
Other Income..... 2,214,763 0 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 0 1,095,269 2,563,714 1,323,577 64,186 (377,734)(e)
Management and
Advisory Fees.... 697,364 0 697,364 0 0 611,196 (1,308,560)(f)
Fees to Related
Parties.......... 0 0 0 23,326 292,575 0 (292,786)(g)
Interest
Expense.......... 0 0 0 50,730 0 4,769,268 0
State Taxes...... 235,208 0 235,208 0 0 0 0
Depreciation--
Other............ 0 0 0 39,581 26,238 0 0
Depreciation--
Property......... 1,548,813 349,465(a) 1,898,278 0 0 0 0
Amortization..... 7,368 0 7,368 0 0 0 536,173 (h)
Transaction
Costs............ 125,926 0 125,926 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
Total Expenses.. 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650 (1,442,907)
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) $ (945,688)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 0 17,271 0 0 0 0
Gain on Sale of
Properties....... 0 0 0 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 (215,797) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
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) (945,688)
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) $(1,194,367)
=========== ========== =========== ========== ========== ========== ===========
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund XIII, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $14,523,161 $ 830,000 $ 11,767 (j) $15,364,928
Fees............. 1,256,304 0 (23,805)(k) 1,232,499
Interest and
Other Income..... 7,687,325 6,768 0 7,694,093
------------ ---------- ------------------ ------------
Total Revenue... $23,466,790 $836,768 $ (12,038) $24,291,520
Expenses:
General and
Administrative... 4,669,012 61,898 (25,273)(l),(m) 4,705,637
Management and
Advisory Fees.... 0 8,596 (8,596)(n) 0
Fees to Related
Parties.......... 23,115 0 0 23,115
Interest
Expense.......... 4,819,998 0 0 4,819,998
State Taxes...... 235,208 21,476 7,925 (o) 264,609
Depreciation--
Other............ 65,819 0 0 65,819
Depreciation--
Property......... 1,898,278 103,347 32,619 (p) 2,034,244
Amortization..... 543,541 494 0 544,035
Transaction
Costs............ 125,926 33,181 0 159,107
------------ ---------- ------------------ ------------
Total Expenses.. 12,380,897 228,992 6,675 12,616,564
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties and
Provision for
Losses on
Properties....... $11,085,893 $ 607,776 $ (18,713) $11,674,956
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 60,227 (4,701)(q) 72,797
Gain on Sale of
Properties....... 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 0 (215,797)
------------ ---------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 10,887,367 668,003 (23,414) 11,531,956
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ---------- ------------------ ------------
Net
Earnings(Losses).. $10,887,367 $ 668,003 $ (23,414) $11,531,956
============ ========== ================== ============
</TABLE>
S-22
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
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
============ =========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 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
============ =========== ============ ========== ========== ============ ===========
Weighted average
units
outstanding
during period... n/a n/a n/a n/a n/a n/a n/a
============ =========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,401 n/a 37,347,401 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 n/a 37,348,464 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... 14,237,405 n/a n/a n/a n/a n/a n/a
Cash
distributions
declared per
$10,000
Investment...... 191 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 $ -- $ -- $ -- $ 0
Mortgages/notes
receivable...... $ 41,269,740 0 $ 41,269,740 $ -- $ -- $247,896,287 $ 0
Receivables,
net............. $ 548,862 0 $ 548,862 $7,141,967 $5,457,493 $ 1,969,339 (148,629)(w)
Investment
in/due from
joint ventures.. $ 1,083,564 0 $ 1,083,564 $ -- $ -- $ -- 0
Total assets.... $708,694,145 $33,656,518(u) $742,350,663 $8,223,820 $6,308,406 $264,700,433 $31,819,047(v1),(w)
Total
liabilities/minority
interest........ $ 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 $32,239,417(v1),(x)
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund XIII, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- ------------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 542 47 n/a 589
============== =========== ==================== ==================
Earnings per
share/unit...... $ n/a 0.17 $ n/a $ 0.25
============== =========== ==================== ==================
Book value per
share/unit...... $ n/a $ 8.39 $ n/a $ 16.40
============== =========== ==================== ==================
Dividends per
share/unit...... $ n/a $ 0.21 $ n/a $ n/a
============== =========== ==================== ==================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 3.26x
============== =========== ==================== ==================
Weighted average
units
outstanding
during period... n/a 4,000,000 n/a n/a
============== =========== ==================== ==================
Weighted average
shares
outstanding
during period... 43,497,401 n/a 1,921,042 45,418,443 (r)
============== =========== ==================== ==================
Shares
outstanding..... 43,498,464 n/a 1,921,042 45,419,506
============== =========== ==================== ==================
Cash
distributions
declared:....... n/a 850,002 n/a $ 19,669,577 (s)
==================
Cash
distributions
declared per
$10,000
Investment...... n/a 213 n/a $ 217 (t)
==================
Balance sheet
data:
Real estate
assets, net..... $ 647,547,023 $29,772,555 $8,242,852 (v2) $ 685,562,430
Mortgages/notes
receivable...... $ 289,166,027 $ -- $ 0 $ 289,166,027
Receivables,
net............. $ 14,969,032 $ 69,067 $ (20,964)(y) $ 15,017,135
Investment
in/due from
joint ventures.. $ 1,083,564 $ 2,449,068 $1,161,279(v2) $ 4,693,911
Total assets.... $1,053,402,369 $34,518,383 $4,832,479 (v2),(y) $1,092,753,231
Total
liabilities/minority
interest........ 346,929,801 $ 950,979 $ (20,964)(y) $ 347,859,816
Total equity.... $ 706,472,568 $33,567,404 $4,853,443 (v2) $ 744,893,415
</TABLE>
S-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
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<CAPTION>
<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 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
</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>
(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)
<TABLE>
<S> <C>
Amortization of goodwill $536,173
</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 $11,767 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the Income Fund as if the leases had been
acquired on January 1, 1998.
S-24
<PAGE>
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<S> <C>
Management fees $ (8,596)
Reimbursement of administrative costs (15,209)
--------
$(23,805)
========
</TABLE>
(l) Represents the elimination of $15,209 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $10,064 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 $8,596 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $7,925 resulting from
assuming that acquisitions of properties that had been operational when
APF acquired them from January 1, 1999 through May 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 Fund 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 $32,619 as a result
of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated using
the straight-line method over the remaining useful lives of the
properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $4,701
as a result of adjusting the historical basis of the real estate owned
by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings owned indirectly by the
Income Fund is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(r) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 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.
S-25
<PAGE>
(v) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Income Fund Total
----------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Shares Offered 3,800,000 2,350,000 1,921,042.35 8,071,042.35
Exchange Value $20 $20 $20 $20
----------- ----------- ------------ ------------
Share Consideration $76,000,000 $47,000,000 $ 38,420,847 $161,420,847
Cash Consideration -- -- 441,000 441,000
APF Transaction Costs 5,025,446 3,107,842 2,569,712 10,703,000
----------- ----------- ------------ ------------
Total Purchase Price $81,025,446 $50,107,842 $ 41,431,559 $172,564,847
=========== =========== ============ ============
Allocation of Purchase
Price:
Net Assets--Historical $ 7,141,252 $10,006,878 $ 33,567,404 $ 50,715,534
Purchase Price
Adjustments:
Land and buildings on
operating leases 6,567,236 6,567,236
Net investment in
direct financing
leases 1,675,616 1,567,616
Investment in joint
ventures 1,161,279 1,161,279
Accrued rental income (1,480,032) (1,480,032)
Intangibles and other
assets (2,792,876) (59,944) (2,852,820)
Goodwill* 42,893,840 -- 42,893,840
Excess purchase price 73,884,194 -- -- 73,884,194
----------- ----------- ------------ ------------
Total Allocation $81,025,446 $50,107,842 $ 41,431,559 $172,564,847
=========== =========== ============ ============
</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 pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,884,194 was
expensed at March 31, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations". Goodwill of 42,893,840 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 73,884,194
Goodwill for CFC (Intangibles and other assets) 42,893,840
CFC/CFS Org Costs/Other Assets 2,792,876
Cash to pay APF transaction costs 8,133,288
APF Common Stock 61,500
APF APIC 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital 33,567,404
Land and buildings on operating leases 6,567,236
Net investment in direct financing leases 1,675,616
Investment in joint ventures 1,161,279
Accrued rental income 1,480,032
Intangibles and other assets 59,944
Cash to pay APF Transaction costs 2,569,712
Cash consideration to Income Funds 441,000
APF Common Stock 19,210
APF APIC 38,401,637
(To record acquisition of Income Fund)
</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 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.
(y) Represents the elimination by the Income Fund of $20,964 in related
party payables recorded as receivables by the Advisor.
S-26
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND XIII, LTD.
The following table sets forth certain financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
XIII, Ltd." in this supplement.
<TABLE>
<CAPTION>
Quarter Ended
March 31, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 896,995 $ 985,975 $3,482,210 $ 3,832,470 $ 3,795,754 $ 3,956,874 $3,679,212
Net income (2).......... 668,003 824,152 2,495,855 3,035,627 3,231,815 3,319,174 3,117,632
Cash distributions
declared............... 850,002 850,002 3,400,008 3,400,008 3,400,008 3,375,011 3,025,009
Net income per unit (2). 0.17 0.20 0.62 0.75 0.80 0.82 0.77
Cash distributions
declared per unit...... 0.21 0.21 0.85 0.85 0.85 0.84 0.76
GAAP book value per
unit................... 8.39 8.66 8.44 8.66 8.75 8.80 8.81
Weighted average number
of Limited Partner
units outstanding...... 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
<CAPTION>
March 31, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $34,518,383 $35,621,162 $34,687,493 $35,523,590 $35,945,070 $36,054,757 $36,145,882
Total partners' capital. 33,567,404 34,627,706 $33,749,403 34,653,556 35,017,937 35,186,130 $35,241,967
</TABLE>
- --------
(1) Revenues include equity in earnings of joint ventures and adjustments to
accrued rental income due to the tenant of certain restaurant properties
filing for bankruptcy.
(2) Net income for the year ended December 31, 1998, includes a provision for
loss on building of $297,885. Net income for the year ended December 31,
1997, includes a loss on sale of land and direct financing lease of
$48,538. Net income for the year ended December 31, 1996, includes a gain
on sale of land of $82,855.
S-27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND XIII, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
September 25, 1992, to acquire for cash, either directly or through joint
venture arrangements, both newly constructed and existing restaurants, as well
as properties upon which restaurants were to be constructed, which are leased
primarily to operators of national and regional fast-food and family-style
restaurant chains. The leases are triple-net leases, with the lessees generally
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of 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
QuarterEnded 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
S-28
<PAGE>
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
S-29
<PAGE>
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.
S-30
<PAGE>
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
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
S-31
<PAGE>
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
S-32
<PAGE>
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
S-33
<PAGE>
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.
S-34
<PAGE>
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.
S-35
<PAGE>
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.
S-36
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998....... F-1
Condensed Statements of Income for the Quarters Ended March 31, 1999
and 1998................................................................. F-2
Condensed Statements of Partner's Capital for the Quarter Ended March 31,
1999 and for the Year Ended December 31, 1998............................ F-3
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998................................................................. F-4
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998............................................................ F-5
Report of Independent Accountants......................................... F-8
Balance Sheets as of December 31, 1998 and 1997........................... F-9
Statements of Income for the Years Ended December 31, 1998, 1997 and 1996. F-10
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996............................................................ F-11
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-12
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................. F-13
Unaudited Pro Forma Financial Information................................. F-23
Unaudited Pro Forma Balance Sheet as of March 31, 1999.................... F-24
Unaudited Pro Forma Statement of Earnings for the Quarter Ended March 31,
1999..................................................................... F-26
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998..................................................................... F-28
Unaudited Pro Forma Statement of Cash Flows for the Quarter Ended March
31, 1999................................................................. F-30
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................. F-32
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-34
</TABLE>
<PAGE>
CNL INCOME FUND 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-1
<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-2
<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-3
<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-4
<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
F-5
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
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 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.
F-6
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
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.
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. 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-7
<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-8
<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-9
<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-10
<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-11
<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-12
<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-13
<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-14
<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-15
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following is a schedule of 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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going concern basis
(meaning the Partnership continues unchanged) at $38,283,180 as of December 31,
1998. The APF Shares are expected to be listed for trading on the New York
Stock Exchange concurrently with the consummation of the Merger, and,
therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
12. Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 11 being adjusted to 1,943,093 shares valued at $20.00 per
APF share.
F-22
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of the Advisor
and the CNL Restaurant Financial Services Group, and the acquisition of the
Income Fund (the acquisition of the Income Fund is referred to as the
"Acquisition"), and is based on estimates and assumptions set forth below in
the notes to such information which included pro forma adjustments. This
unaudited pro forma financial information has been prepared utilizing the
historical financial statements of APF, the historical combined financial
information of the Income Fund, the Advisor and CNL Restaurant Financial
Services Group (shown separately as CFS and CFC) and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, Income Fund, Advisor and CNL Restaurant Financial Services Group. The
pro forma balance sheet assumes that the Acquisition occurred on 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.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of March 31, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL
Historical Pro Forma Historical Financial
APF Adjustments Subtotal Advisor Services, Inc.
------------ ------------ ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... 475,787,661 58,749,637 (A) 534,537,298 0 0
Net Investment in Direct
Financing Leases....... 123,270,117 0 123,270,117 0 0
Mortgages and Notes
Receivable............. 41,269,740 0 41,269,740 0 0
Other Investments....... 16,199,792 0 16,199,792 0 0
Investment In Joint
Ventures............... 1,083,564 0 1,083,564 0 0
Cash and Cash
Equivalents............ 35,796,119 (25,093,119)(A) 10,703,000 591,712 552,415
Restricted
Cash/Certificates of
Deposit................ 2,007,278 0 2,007,278 0 0
Receivables (net
allowances)/Due from
Related Party.......... 548,862 0 548,862 7,141,967 5,457,493
Accrued Rental Income... 5,007,334 0 5,007,334 0 0
Other Assets............ 7,723,678 0 7,723,678 490,141 298,498
Goodwill................ 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Assets........... $708,694,145 $33,656,518 $742,350,663 $8,223,820 $6,308,406
============ =========== ============ ========== ==========
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 3,464,190 $ 0 $ 3,464,190 $ 576,531 $ 304,375
Accrued Construction
Costs Payable.......... 10,172,169 0 10,172,169 0 0
Distributions Payable... 0 0 0 119,808 0
Due to Related Parties.. 148,629 0 148,629 0 563,724
Income Tax Payable...... 0 0 0 0 0
Line of Credit/Notes
payable................ 34,150,000 33,656,518 (A) 67,806,518 386,229 0
Deferred Income......... 2,052,530 0 2,052,530 0 0
Rents Paid in Advance... 1,340,636 0 1,340,636 0 0
Minority Interest....... 280,970 0 280,970 0 0
Common Stock............ 373,483 0 373,483 0 0
Common Stock--Class A... 0 0 0 6,400 2,000
Common Stock--Class B... 0 0 0 3,600 724
Additional Paid-in-
capital................ 670,005,177 0 670,005,177 4,617,047 5,303,503
Accumulated
distributions in excess
of net earnings........ (13,293,639) 0 (13,293,639) 2,514,205 134,080
Partners Capital........ 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Liabilities and
Equity................ $708,694,145 $33,656,518 $742,350,663 $8,223,820 $6,308,406
============ =========== ============ ========== ==========
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of March 31, 1999
<TABLE>
<CAPTION>
Historical Historical
CNL Combining CNL Income
Financial Pro Forma Combined Fund XIII, Pro Forma Adjusted
Corp. Adjustments APF Ltd. Adjustments Pro Forma
------------ ------------ -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... 0 0 534,537,298 22,842,012 6,567,236 B2 563,946,546
Net Investment in Direct
Financing Leases....... 0 0 123,270,117 6,930,543 1,675,616 B2 131,876,276
Mortgages and Notes
Receivable............. 247,896,287 0 289,166,027 -- 0 289,166,027
Other Investments....... 6,353,482 0 22,553,274 0 0 22,553,274
Investment In Joint
Ventures............... 0 0 1,083,564 2,449,068 1,161,279 B2 4,693,911
Cash and Cash
Equivalents............ 4,896,688 (8,133,288)(B1) 8,610,527 687,717 (2,569,712) B2 6,287,532
(441,000) B2
Restricted
Cash/Certificates of
Deposit................ 853,243 0 2,860,521 -- 0 2,860,521
Receivables (net
allowances)/Due from
Related Party.......... 1,969,339 (148,629)(C) 14,969,032 69,067 (20,964) E 15,017,135
Accrued Rental Income... 0 0 5,007,334 1,480,032 (1,480,032) B2 5,007,334
Other Assets............ 2,731,394 (2,792,876)(B1) 8,450,835 59,944 (59,944) B2 8,450,835
Goodwill................ 0 42,893,840 (B1) 42,893,840 0 0 42,893,840
------------ ------------ -------------- ----------- ----------- --------------
Total Assets........... $264,700,433 $ 31,819,047 $1,053,402,369 $34,518,383 $ 4,832,479 $1,092,753,231
============ ============ ============== =========== =========== ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 1,613,959 $ 0 $ 5,959,055 $ 51,786 $ 0 $ 6,010,841
Accrued Construction
Costs Payable.......... 0 0 10,172,169 0 0 10,172,169
Distributions Payable... 0 0 119,808 850,002 0 969,810
Due to Related Parties.. 31,310,681 (148,629)(C) 31,874,405 20,964 (20,964) E 31,874,405
Income Tax Payable...... 271,741 (271,741)(D) 0 0 0 0
Line of Credit/Notes
payable................ 226,937,481 0 295,130,228 0 0 295,130,228
Deferred Income......... 0 0 2,052,530 0 0 2,052,530
Rents Paid in Advance... 0 0 1,340,636 28,227 0 1,368,863
Minority Interest....... 0 0 280,970 0 0 280,970
Common Stock............ 0 61,500 (B1) 808,469 0 19,210 B2 827,679
Common Stock--Class A... 200 (8,600)(B1) 0 0 0 0
Common Stock--Class B... 501 (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 3,937,095 122,938,500(B1) 792,570,191 0 38,401,637 B2 830,971,828
(13,857,645)(B1)
Accumulated
distributions in excess
of net earnings........ 628,775 (3,277,060)(B1) (86,906,092) 0 0 (86,906,092)
(73,884,194)(B1)
271,741 (D)
Partners Capital........ 0 0 0 33,567,404 (33,567,404) B2 0
------------ ------------ -------------- ----------- ----------- --------------
Total Liabilities and
Equity................ $264,700,433 $ 31,819,047 $1,053,402,369 $34,518,383 $ 4,832,479 $1,092,753,231
============ ============ ============== =========== =========== ==============
</TABLE>
F-25
<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
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $12,184,008 $2,339,153(a) $14,523,161 $ 0 $ 0 $ 0
Fees................... 0 0 0 2,307,364 1,391,466 8,137
Interest and Other
Income................ 2,214,763 0 2,214,763 47,213 129,362 5,233,919
----------- ---------- ----------- ---------- ---------- ----------
Total Revenue.......... $14,398,771 $2,339,153 $16,737,924 $2,354,577 $1,520,828 $5,242,056
Expenses:
General and
Administrative
Expenses.............. 1,095,269 0 1,095,269 2,563,714 1,323,577 64,186
Management and Advisory
Fees.................. 697,364 0 697,364 0 0 611,196
Fees Paid to Related
Parties............... 0 0 0 23,326 292,575 0
Interest Expense....... 0 0 0 50,730 0 4,769,268
State Taxes............ 235,208 0 235,208 0 0 0
Depreciation--Other.... 0 0 0 39,581 26,238 0
Depreciation--
Property.............. 1,548,813 349,465(a) 1,898,278 0 0 0
Amortization........... 7,368 0 7,368 0 0 0
Transaction Costs...... 125,926 0 125,926 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
Total Expenses......... 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, 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)
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 17,271 0 17,271 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Provision For Loss on
Properties............ (215,797) 0 (215,797) 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
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)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 127,496 48,017 73,166
----------- ---------- ----------- ---------- ---------- ----------
Net Earnings (Losses)... $10,490,297 $1,989,688 $12,479,985 $ (195,278) $ (73,545) $ (129,428)
=========== ========== =========== ========== ========== ==========
Earnings Per
Share/Unit............. $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ==========
Book Value Per
Share/Unit............. $ 17.59 $ 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
=========== ========== =========== ========== ========== ==========
Ratio of Earnings to
Fixed Charges.......... 50.03x n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========== ==========
Wtd. Avg. Units
Outstanding............ 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
=========== ========== =========== ========== ========== ==========
Shares Outstanding...... 37,348,464 n/a 37,348,464 n/a n/a n/a
=========== ========== =========== ========== ========== ==========
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 Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund XIII, Ltd. Adjustments Pro Forma
----------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $14,523,161 $ 830,000 $ 11,767 (j) $ 15,364,928
Fees................... (2,450,663)(b),(c) 1,256,304 0 (23,805)(k) 1,232,499
Interest and Other
Income................ 62,068 (d) 7,687,325 6,768 0 7,694,093
----------- ----------- --------- --------- ------------
Total Revenue.......... $(2,388,595) $23,466,790 $ 836,768 $ (12,038) $ 24,291,520
Expenses:
General and
Administrative
Expenses.............. (377,734)(e) 4,669,012 61,898 (25,273)(l),(m) 4,705,637
Management and Advisory
Fees.................. (1,308,560)(f) 0 8,596 (8,596)(n) 0
Fees Paid to Related
Parties............... (292,786)(g) 23,115 0 0 23,115
Interest Expense....... 0 4,819,998 0 0 4,819,998
State Taxes............ 0 235,208 21,476 7,925 (o) 264,609
Depreciation--Other.... 0 65,819 0 0 65,819
Depreciation--
Property.............. 0 1,898,278 103,347 32,619 (p) 2,034,244
Amortization........... 536,173 (h) 543,541 494 0 544,035
Transaction Costs...... 0 125,926 33,181 0 159,107
----------- ----------- --------- --------- ------------
Total Expenses......... (1,442,907) 12,380,897 228,992 6,675 12,616,564
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties, and
Provision for Losses on
Properties............. $ (945,688) $11,085,893 $ 607,776 $ (18,713) $ 11,674,956
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 0 17,271 60,227 (4,701)(q) 72,797
Gain on Sale of
Properties............ 0 0 0 0 0
Provision For Loss on
Properties............ 0 (215,797) 0 0 (215,797)
----------- ----------- --------- --------- ------------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... (945,688) 10,887,367 668,003 (23,414) 11,531,956
Benefit/(Provision) for
Federal Income
Taxes................. (248,679)(i) 0 0 0 0
----------- ----------- --------- --------- ------------
Net Earnings (Losses)... $(1,194,367) $10,887,367 $ 668,003 $ (23,414) $ 11,531,956
=========== =========== ========= ========= ============
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.17 $ n/a $ 0.25
=========== =========== ========= ========= ============
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.39 $ n/a $ 16.40
=========== =========== ========= ========= ============
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.21 $ n/a $ n/a
=========== =========== ========= ========= ============
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.26x
=========== =========== ========= ========= ============
Wtd. Avg. Units
Outstanding............ n/a n/a 4,000,000 n/a n/a
=========== =========== ========= ========= ============
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,401 n/a 1,921,042 45,418,443 (r)
=========== =========== ========= ========= ============
Shares Outstanding...... 6,150,000 43,498,464 n/a 1,921,042 45,419,506
=========== =========== ========= ========= ============
Calculation of Pro Forma
Distributions: 0
Pro Forma Cash from
Operations from
Statement of Cash
Flows................. $(22,902,318)
Addback Pro Forma
Investments in Notes
Receivable............ 42,571,895
------------
Adjusted Pro Forma
Distributions Declared: $ 19,669,577 (s)
============
Pro Forma Wtd. Avg.
Dollars Outstanding.... $908,368,867 (t)
============
Pro Forma Cash
Distributions Declared
per
$10,000 Investment..... $ 217 (u)
============
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 21,919,865(a) $55,049,526 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $21,919,865 $64,106,902 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 2,889,368(a) 6,931,658 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 2,889,368 12,298,325 11,435,228 7,966,916 25,677,829
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties, and
Provision for Losses on
Properties............. $32,778,080 $19,030,497 $51,808,577 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Other Expenses......... 0 0 0 0 0 0
Provision For Loss on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
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
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $19,030,497 $51,182,905 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Units
Outstanding............ n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,569,350 34,217,569 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 34,757 37,372,684 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Calculation of Pro Forma
Distributions Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows.............
Addback Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable......
Addback Pro Forma
Investments in Notes
Receivable............
Adjusted Pro Forma
Distributions Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund XIII, Ltd. Adjustments Pro Forma
------------ ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned Income............. $ 0 $55,049,526 $3,189,397 47,069 (j) $ 58,285,992
Fees................................. (32,715,768)(b),(c) 3,226,263 0 (69,563) (k) 3,156,700
Interest and Other Income............ 207,144 (d) 32,221,925 49,321 0 32,271,246
------------ ----------- ---------- --------- ------------
Total Revenue........................ $(32,508,624) $90,497,714 $3,238,718 $ (22,494) $ 93,713,938
Expenses:
General and Administrative........... (4,241,719)(e) 15,939,556 191,097 (76,253) (l),(m) 16,054,400
Management and Advisory Fees......... (4,658,434)(f) 0 35,257 (35,257) (n) 0
Fees to Related Parties.............. (2,161,897)(g) 858,787 0 0 858,787
Interest Expense..................... 0 21,498,589 0 0 21,498,589
State Taxes.......................... 0 567,446 16,172 11,948 (o) 595,566
Depreciation--Other.................. 0 199,157 0 0 199,157
Depreciation--Property............... (340,898)(r) 6,590,760 421,840 130,478 (p) 7,143,078
Amortization......................... 2,144,692 (h) 2,308,693 813 0 2,309,506
Transaction Costs.................... 0 157,054 23,291 0 180,345
------------ ----------- ---------- --------- ------------
Total Expenses....................... (9,258,256) 48,120,042 688,470 30,916 48,839,428
Operating Earnings (Losses) Before
Equity in Earnings of Joint
Ventures/Minority Interests, Gain on
Sale of Properties, and Provision for
Losses on Properties................. $(23,250,368) $42,377,672 $2,550,248 $ (53,410) $ 44,874,510
Equity in Earnings of Joint
Venture/Minority Interest........... 0 (14,138) 243,492 L (18,804) (q) 210,550
Gain on Sale of Properties........... 0 0 0 0 0
Gain on Securitization............... 0 3,694,351 0 0 3,694,351
Other Expenses....................... 0 0 0 0 0
Provision For Loss on Properties..... 0 (611,534) (297,885) 0 (909,419)
------------ ----------- ---------- --------- ------------
Net Earnings (Losses) Before Benefit/
(Provision) for Federal Income
Taxes................................ (23,250,368) 45,446,351 2,495,855 (72,214) 47,869,992
Benefit/(Provision) for Federal
Income Taxes........................ 6,898,434 (i) 0 0 0 0
------------ ----------- ---------- --------- ------------
Net Earnings (Losses)................. $(16,351,934) $45,446,351 $2,495,855 $ (72,214) $ 47,869,992 (0)
============ =========== ========== ========= ============
Earnings Per Share/Unit............... $ n/a $ n/a $ 0.62 $ n/a $ 1.13
============ =========== ========== ========= ============
Book Value Per Share/Unit............. $ n/a $ n/a $ 8.44 $ n/a $ 16.44
============ =========== ========== ========= ============
Dividends Per Share/Unit.............. $ n/a $ n/a $ 0.85 $ n/a $ n/a
============ =========== ========== ========= ============
Ratio of Earnings to Fixed Changes.... n/a n/a n/a n/a 3.17x
============ =========== ========== ========= ============
Wtd. Avg. Units Outstanding........... n/a n/a 4,000,000 n/a n/a
============ =========== ========== ========= ============
Wtd. Avg. Shares Outstanding.......... 6,150,000 40,367,569 n/a 1,921,042 42,288,611 (s)
============ =========== ========== ========= ============
Shares Outstanding.................... 6,150,000 43,522,684 n/a 1,921,042 45,443,726
============ =========== ========== ========= ============
Calculation of Pro Forma Distributions
Declared:
Pro Forma Cash from Operations from
Statement of Cashflows.............. $ 58,776,740
Addback Pro Forma Net Cash Proceeds
from Securitization of Notes
Receivable.......................... (265,871,668)
Addback Pro Forma Investments in
Notes Receivable.................... 288,590,674
------------
Adjusted Pro Forma Distributions
Declared: $ 81,495,746 (t)
============
Pro Forma Wtd. Avg. Dollars
Outstanding.......................... $845,772,227 (u)
============
Pro Forma Cash Distributions Declared
per $10,000 Investment............... $ 964 (v)
============
</TABLE>
F-29
<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 Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 10,490,297 $ 1,989,688 (a) $ 12,479,985 $ (195,278) $ (73,545) $ (129,428)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 1,548,813 349,465 (b) 1,898,278 39,581 0 0
Amortization expense... 7,368 0 7,368 0 26,238 424,697
Minority interest in
income of consolidated
joint venture......... 7,763 0 7,763 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 23,234 0 23,234 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 215,797 0 215,797 0 0 (73,166)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (82,660) 0 (82,660) (377,933) (242,251) (6,771)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (449,580)
Investment in notes
receivable............ 0 0 0 0 0 (42,571,895)
Collections on notes
receivable............ 0 0 0 0 0 6,417,907
Increase in restricted
cash.................. 0 0 0 0 0 (402,461)
Decrease in due from
related party......... 0 0 0 0 0 55,382
Decrease (increase) in
prepaid expenses...... 27,548 0 27,548 0 1,811 0
Decrease in net
investment in direct
financing leases...... 787,375 0 787,375 0 0 0
Increase in accrued
rental income......... (1,047,421) 0 (1,047,421) 0 0 0
Decrease (increase) in
intangibles and other
assets................ (30,554) 7,942
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 306,277 0 306,277 (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 0 71,853 25,550 0 0
Decrease in accrued
interest.............. 0 0 0 0 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 386,365 0 386,365 0 0 0
Increase (decrease) in
deferred rental
income................ 862,647 0 862,647 0 0 0
------------- ------------ ------------- ----------- --------- -----------
Total adjustments...... 3,114,959 349,465 3,464,424 (1,183,414) (344,708) (37,064,802)
------------- ------------ ------------- ----------- --------- -----------
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)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 0 0 0 0
Additions to land and
buildings on operating
leases................ (77,028,830) (58,749,637)(e) (135,778,467) (31,577) (10,092) 0
Investment in direct
financing leases...... (29,608,346) 0 (29,608,346) 0 0 0
Investment in joint
venture............... (117,662) 0 (117,662) 0 0 0
Aqcuisition of
businesses............
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 134,981
Investment in mortgage
notes receivable...... (1,388,463) 0 (1,388,463) 0 0 0
Collections on mortgage
note receivable....... 75,010 0 75,010 0 0 0
Investment in notes
receivable............ (1,087,483) 0 (1,087,483) 0 0 0
Collection on notes
receivable............ 239,596 0 239,596 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... 0 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------ ------------- ----------- --------- -----------
Net cash provided by
(used in) investing
activities............ (108,916,178) (58,749,637) (167,665,815) (31,577) (10,092) 134,981
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,735 0 210,735 1,288,673 20,572 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,142,237) 0 (1,142,237) 0 0 0
Payment of stock
issuance costs........ (722,001) 0 (722,001) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 36,587,245 33,656,518 (e) 70,243,763 0 0 49,730,934
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (2,385) (10,291,473)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (8,610) 0 (8,610) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0 0
Distributions to
stockholders.......... (14,237,405) 0 (14,237,405) 0 0 0
Other.................. (200,234) 0 (200,234) 0 0 (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
Cash at beginning of
year................... 123,199,837 0 123,199,837 713,308 962,573 2,526,078
------------- ------------ ------------- ----------- --------- -----------
Cash at end of year..... $ 35,796,119 $(22,753,966) $ 13,042,153 $ 591,712 $ 552,415 $ 4,896,688
============= ============ ============= =========== ========= ===========
</TABLE>
F-30
<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>
Combining Historical CNL
Pro Forma Income Fund Pro Forma Adjusted
Adjustments Combined APF XIII, Ltd. Adjustments Pro Forma
----------- ------------ -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(1,194,367)(a) $ 10,887,367 $668,003 $ (23,414)(a) $ 11,531,956
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 0 1,937,859 103,346 32,619 (b) 2,073,824
Amortization expense... 536,173 (c) 994,476 495 0 994,971
Minority interest in
income of consolidated
joint venture......... 0 7,763 0 0 7,763
Equity in earnings of
joint ventures, net of
distributions......... 0 23,234 2,209 4,701 (d) 30,144
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 0 142,631 0 0 142,631
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (709,615) 52,052 0 (657,563)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (449,580) 0 0 (449,580)
Investment in notes
receivable............ 0 (42,571,895) 0 0 (42,571,895)
Collections on notes
receivable............ 0 6,417,907 0 0 6,417,907
Increase in restricted
cash.................. 0 (402,461) 0 0 (402,461)
Decrease in due from
related party......... 0 55,382 0 0 55,382
Decrease (increase) in
prepaid expenses...... 0 29,359 (16,177) 0 13,182
Decrease in net
investment in direct
financing leases...... 0 787,375 21,347 0 808,722
Increase in accrued
rental income......... 0 (1,047,421) (55,429) 0 (1,102,850)
Decrease (increase) in
intangibles and other
assets................ 0 (22,612) 0 0 (22,612)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (768,267) 40,795 0 (727,472)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 97,403 (1,565) 0 95,838
Decrease in accrued
interest.............. 0 (362,877) 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 0 386,365 (26,341) 0 360,024
Increase (decrease) in
deferred rental
income................ 0 862,647 0 0 862,647
----------- ------------ -------- ---------- ------------
Total adjustments...... 536,173 (34,592,327) 120,732 37,320 (34,434,275)
----------- ------------ -------- ---------- ------------
Net cash provided by
(used in) operating
activities............ (658,194) (23,704,960) 788,735 13,906 (22,902,319)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 0 0 0
Additions to land and
buildings on operating
leases................ (135,820,136) 0 (135,820,136)
Investment in direct
financing leases...... 0 (29,608,346) 0 0 (29,608,346)
Investment in joint
venture............... 0 (117,662) 0 0 (117,662)
Aqcuisition of
businesses............ (8,133,288)(f) (8,133,288) 0 (2,569,712)(g) (11,144,000)
(441,000)(g)
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 134,981 0 0 134,981
Investment in mortgage
notes receivable...... 0 (1,388,463) 0 0 (1,388,463)
Collections on mortgage
note receivable....... 0 75,010 0 0 75,010
Investment in notes
receivable............ 0 (1,087,483) 0 0 (1,087,483)
Collection on notes
receivable............ 0 239,596 0 0 239,596
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 (17,875) 0 (17,875)
----------- ------------ -------- ---------- ------------
Net cash provided by
(used in) investing
activities............ (8,133,288) (175,705,791) (17,875) (3,010,712) (178,734,378)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 1,519,980 0 0 1,519,980
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,142,237) 0 0 (1,142,237)
Payment of stock
issuance costs........ 0 (722,001) 0 0 (722,001)
Proceeds from borrowing
on line of
credit/notes payable.. 0 119,974,697 0 0 119,974,697
Payment on line of
credit/notes payable.. 0 (22,874,147) 0 0 (22,874,147)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (8,610) 0 0 (8,610)
Distributions to
limited partners...... 0 0 (850,002) 0 (850,002)
Distributions to
stockholders.......... 0 (14,237,405) 0 0 (14,237,405)
Other.................. 0 (209,836) 0 0 (209,836)
----------- ------------ -------- ---------- ------------
Net cash provided by
(used in) financing
activities............ 0 82,300,441 (850,002) 0 81,450,439
Net increase in cash.... (8,791,482) (117,110,310) (79,142) (2,996,806) (120,186,258)
Cash at beginning of
year................... 0 127,401,796 766,859 0 128,168,655
----------- ------------ -------- ---------- ------------
Cash at end of year..... (8,791,482) 10,291,486 687,717 (2,996,806) 7,982,397
=========== ============ ======== ========== ============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Restated Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income(loss)........ $ 32,152,408 $ 19,030,497 (a) $ 51,182,905 $10,656,379 $(468,133) $ 427,134
Adjustments to reconcile
net income(loss) to net
cash provided by (used
in) operating
activities:
Depreciation........... 4,042,290 2,889,368 (b) 6,931,658 119,923 79,234 0
Amortization expense... 11,808 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
leases................ 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) (2,187,652) 0 0 0
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 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 693,372 0 0 0
------------- ------------ ------------- ----------- ---------- -------------
Total adjustments...... 6,963,867 2,889,368 9,853,235 (3,608,563) 316,963 1,610,591
------------- ------------ ------------- ----------- ---------- -------------
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
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (58,749,637)(e) (258,851,304) (381,671) (236,372) 0
Investment in direct
financing leases...... (47,115,435) (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) (974,696) 0 0 0
Acquisition of
businesses
Purchase of other
investments........... (16,083,055) (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) (6,281,069) 0 0 0
0 0 0 0 0
Other.................. 0 0 200,000 0 0
------------- ------------ ------------- ----------- ---------- -------------
Net cash provided
by(used in) investing
activities............ (277,338,756) (58,749,637) (336,088,393) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0
0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 33,656,518 (e) 30,645,558 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) (34,073) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0
Distributions to
stockholders.......... (39,449,149) (39,449,149) (9,364,488) 0 0
Other.................. (95,101) (95,101) 0 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
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
============= ============ ============= =========== ========== =============
</TABLE>
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL Income Merger
Pro Forma Combined Fund Pro Forma Adjusted
Adjustments APF XIII, Ltd. Adjustments Pro Forma
------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income(loss)........ $(16,351,934)(a) $ 45,446,351 $2,495,855 $(72,214)(a) $47,869,992
Adjustments to reconcile
net income(loss) to net
cash provided by(used
in) operating
activities:
Depreciation........... (340,898)(b) 6,789,917 421,840 130,478 (b) 7,342,235
Amortization expense... 2,144,692 (c) 4,458,776 637 4,459,413
Minority interest in
income of consolidated
joint venture......... 30,156 0 30,156
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 6,954 18,804 (d) 10,318
Loss(gain) on sale of
land, building, net
investment in direct
leases................ 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 1,009,576 297,885 1,307,461
Gain on
securitization........ (3,356,538) 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 265,871,668 0 265,871,668
Decrease(increase) in
other receivables..... (2,543,413) (97,173) (2,640,586)
Increase in accrued
interest income
included in notes
receivable............ (170,492) 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0
Investment in notes
receivable............ (288,590,674) 0 (288,590,674)
Collections on notes
receivable............ 23,539,641 0 23,539,641
Decrease in restricted
cash.................. 2,504,091 0 2,504,091
Decrease(increase) in
due from related
party................. (953,688) 0 (953,688)
Increase in prepaid
expenses.............. 7,246 1,915 9,161
Decrease in net
investment in direct
financing leases...... 1,971,634 82,115 2,053,749
Increase in accrued
rental income......... (2,187,652) (783) (2,188,435)
Increase in intangibles
and other assets...... (154,351) 0 (154,351)
Increase(decrease) in
accounts payable,
accrued expenses and
other
liabilities........... 846,680 3,320 850,000
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. (133,364) 15,738 (117,626)
Increase in accrued
interest.............. (77,968) 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 48,998 485,841
Decrease in deferred
rental income......... 693,372 0 693,372
------------ ------------ ---------- ----------- ------------
Total adjustments...... 1,803,794 9,976,020 781,446 149,282 10,906,747
------------ ------------ ---------- ----------- ------------
Net cash provided
by(used in) operating
activities............ (14,548,140) 55,422,371 3,277,301 77,068 58,776,740
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 0 2,385,941
Additions to land and
buildings on operating
leases................ (259,469,347) 0 (259,469,347)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435)
Investment in joint
venture............... (974,696) (539) (975,235)
Acquisition of
businesses............ (8,133,288)(f) (8,133,288) 0 (2,569,712)(g) (11,144,000)
(441,000)(g)
Purchase of other
investments........... (16,083,055) 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 295,514 0 295,514
Proceeds from retained
interest and
securities, excluding
investment
income................ 212,821 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648)
Collections on mortgage
note receivable....... 291,990 0 291,990
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750)
Collections on
equipment notes
receivable............ 3,046,873 0 3,046,873
Decrease in restricted
cash.................. 0 0 0
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069)
0 0 0
Other.................. 200,000 (17,875) 182,125
------------ ------------ ---------- ----------- ------------
Net cash provided
by(used in) investing
activities............ (8,133,288) (342,348,149) (18,414) (3,010,712) (345,377,275)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 386,592,011 0 386,592,011
Contributions from
limited partners...... 0 0 0
0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925)
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 455,102,478 0 455,102,478
Payment on line of
credit/notes payable.. (411,813,826) 0 (411,813,826)
Retirement of shares of
common stock.......... (639,528) 0 (639,528)
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073)
Distributions to
limited partners...... 0 (3,400,008) (3,400,008)
Distributions to
stockholders.......... (48,813,637) 0 (48,813,637)
Other.................. (2,595,088) 0 (2,595,088)
------------ ------------ ---------- ----------- ------------
Net cash provided
by(used in) financing
activities............ 0 338,643,762 (3,400,008) 0 335,243,754
Net increase(decrease)
in cash................ (22,681,428) 51,717,984 (141,121) (2,933,644) 48,643,219
Cash at beginning of
year................... 49,829,130 907,980 50,737,110
------------ ------------ ---------- ----------- ------------
Cash at end of year..... (22,681,428) 101,547,114 $ 766,859 $(2,933,644) $ 99,380,329
============ ============ ========== =========== ============
</TABLE>
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of 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 Income Fund. This unaudited pro forma financial
information has been prepared utilizing the historical financial statements of
APF and the historical combined financial information of the Advisor, CNL
Restaurant Financial Services Group and the Income Fund and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, the Advisor the CNL Restaurant Financial Services Group and the Income
Fund. The Pro Forma Balance Sheet was prepared as if the transactions described
above occurred on 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 Fund 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 Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
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-34
<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 Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Shares Offered........ 3,800,000 2,350,000 1,921,042.35 8,071,042.35
Exchange Value........ $ 20 $ 20 $ 20 $ 20
----------- ----------- ------------ ------------
Share Consideration... $76,000,000 $47,000,000 $ 38,420,847 $161,420,847
Cash Consideration.... -- -- 441,000 441,000
APF Transaction Costs. 5,025,446 3,107,842 2,569,712 10,703,000
----------- ----------- ------------ ------------
Total Purchase
Price............ $81,025,446 $50,107,842 $ 41,431,559 $172,564,847
=========== =========== ============ ============
Allocation of Purchase
Price:
Net Assets -
Historical........... $ 7,141,252 $10,006,878 $ 33,567,404 $ 50,715,534
Purchase Price
Adjustments:
Land and buildings
on operating
leases............. 6,567,236 6,567,236
Net investment in
direct financing
leases............. 1,675,616 1,675,616
Investment in joint
ventures........... 1,161,279 1,161,279
Accrued rental
income............. (1,480,032) (1,480,032)
Intangibles and
other assets....... (2,792,876) (59,944) (2,852,820)
Goodwill*........... 42,893,840 -- 42,893,840
Excess purchase
price.............. 73,884,194 -- -- 73,884,194
----------- ----------- ------------ ------------
Total Allocation.. $81,025,446 $50,107,842 $ 41,431,559 $172,564,847
=========== =========== ============ ============
</TABLE>
- --------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $10,703,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of
the Advisor, CNL Financial Services Group and the Income Fund. The
excess purchase price paid for the Advisor to a related party of
$73,884,194 was expensed at March 31, 1999 because the Advisor has not
been deemed to qualify as a "business" for purposes of applying APB
Opinion No. 16, "Business Combinations". Goodwill of 42,893,840
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...................................... 73,884,194
Goodwill for CFC (Intangibles and other
assets)....................................... 42,893,840
CFC/CFS Org Costs/Other Assets................ 2,792,876
Cash to pay APF transaction costs............. 8,133,288
APF Common Stock.............................. 61,500
APF APIC...................................... 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital............................... 33,567,404
Land and buildings on operating leases......... 6,567,236
Net investment in direct financing leases...... 1,675,616
Investment in joint ventures................... 1,161,279
Accrued rental income......................... 1,480,032
Intangibles and other assets.................. 59,944
Cash to pay APF Transaction costs............. 2,569,712
Cash consideration to Income Fund............. 441,000
APF Common Stock.............................. 19,210
APF APIC...................................... 38,401,637
(To record acquisition of Income Fund)
</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 Income Fund of $20,964 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, 1999.
(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
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
adjustments were made for any properties for the periods prior to
their construction completion and availability for occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................... $ (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 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
</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>
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $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)
<TABLE>
<S> <C>
Amortization of goodwill....................................... $536,173
</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 $11,767 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................... $ (8,596)
Reimbursement of administrative costs......................... (15,209)
--------
$(23,805)
========
</TABLE>
(l) Represents the elimination of $15,209 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $10,064 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 $8,596 in management fees by the
Income Fund to the Advisor.
(o) Represents additional state income taxes of $7,925 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through May 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 Fund 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 $32,619 as a
result of adjusting the historical basis of the real estate wholly
owned by the Income Fund to fair value as a result of accounting
for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings is
being depreciated using the straight-line method over the remaining
useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $4,701 as a result of adjusting the historical basis of the real
estate owned by the Income Fund, indirectly through joint venture
or tenancy in common arrangements, to fair value as a result of
accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1999 were
assumed to have been issued and outstanding as of January 1,
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
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.
(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.
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates.......................... $ (1,773,406)
Secured equipment lease fees.............................. (54,998)
Advisory fees............................................. (305,030)
Reimbursement of administrative costs..................... (408,762)
Acquisition fees.......................................... (21,794,386)
Underwriting fees......................................... (388,491)
Administrative, executive and guarantee fees.............. (1,233,043)
Servicing fees............................................ (1,570,331)
Development fees.......................................... (229,153)
Management fees........................................... (1,851,004)
------------
Total................................................... $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the year ended
December 31, 1998, which were deferred for pro forma purposes as
described in 5(II)(c). These deferred loan origination fees are
being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs........................... $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,851,004)
Administrative executive and guarantee fees................ (1,233,043)
Servicing fees............................................. (1,269,357)
Advisory fees.............................................. (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(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.
F-40
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4)
<TABLE>
<S> <C>
Amortization of goodwill..................................... $2,144,692
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $47,069 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................... $(35,257)
Reimbursement of administrative costs......................... (34,306)
--------
$(69,563)
========
</TABLE>
(l) Represents the elimination of $34,306 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $41,947 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $35,257 in management fees by the
Income Fund to the Advisor.
(o) Represents additional state income taxes of $11,948 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1998 through 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 Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
(p) Represents an increase in depreciation expense of $130,478 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Income Fund through joint venture or tenancy in
common arrangements with affiliates or unrelated third parties, to
fair value as a result by the Income Fund to fair value as a result
of accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $18,804 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF
and the Advisor which on a historical basis were capitalized as
part of the basis of the building.
F-41
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(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 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.
F-42
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non-Cash Investing Activites
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B)
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the use of amounts borrowed under APF's credit facility
and the use of cash to 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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
F-43
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund XIII, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund XIII, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
A-1
<PAGE>
(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
A-2
<PAGE>
Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
A-3
<PAGE>
Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among by and among CNL American Properties Fund,
Inc., a Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware
limited partnership (the "Operating Partnership"), CNL APF GP corp., a
Delaware corporation (the "OP General Partner"), CNL Income Fund XIII, Ltd., a
Florida limited partnership (the "Fund"), and Robert A. Bourne, James M.
Seneff, Jr., and CNL Realty Corporation, a Florida corporation (together with
Messrs. Borne and Seneff, the "General Partners"). APF, the Operating
Partnership, the OP General Partner, the Fund and the General Partners are
referred to collectively herein as the "Parties" and individually as a
"Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund
will be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. Amendments to Merger Agreement
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its
entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred
by the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option." In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote
against the Merger and affirmatively elect the note option, such limited
partners shall be entitled to receive, in lieu of the Share
Consideration, notes (the "Notes") in the aggregate amount equal to 97%
of the value (based on the Exchange Value as defined in the Registration
Statement) of the Share Consideration such Dissenting Partners would
have otherwise received had such partners not elected to receive the
Notes (the "Note Option"). The Notes will mature on the fifth
anniversary of the Closing Date and will bear interest at a fixed rate
equal to seven percent. The aggregate Share Consideration shall be
reduced on a one-for-basis for all APF Shares otherwise distributable to
Dissenting Partners had such Dissenting Partners not elected the Note
Option."
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1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to
Dissenting Limited Partners shall not have exceeded 15% of the value of
the Share Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. General
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will
constitute one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of
Florida or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Florida.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
By: ____________________________
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
By: ____________________________
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
By: ____________________________
Its: President
CNL INCOME FUND XIII, Ltd.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
By: ____________________________
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
By: ____________________________
Its: Chief Executive Officer
/s/ Robert A. Bourne
_____________________________________
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
_____________________________________
James M. Seneff, Jr., as General
Partner
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<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund XIII, Ltd., a Florida limited
partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL
Realty Corporation, a Florida corporation (together with Messrs. Bourne and
Seneff, the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
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"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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<PAGE>
"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
B-7
<PAGE>
(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 3,886,185 fully paid and nonassessable APF Common
Shares (1,943,093 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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<PAGE>
with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $34,688,461, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 57,113,815 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 4,000,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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<PAGE>
will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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<PAGE>
(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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<PAGE>
from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $3,886,185 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $388,619 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
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 XIII, 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
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Appendix C
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF LIMITED PARTNERSHIP
OF
CNL Income Fund XIII, Ltd.
- --------------------------------------------------------------------------------
(Insert name currently on file with Florida Dept. of State)
Pursuant to the provisions of section 620.109, Florida Statues, this Florida
limited partnership, whose certificate was filed with the Florida Department of
State on September 25, 1992, adopts the following certificate of amendment to
its certificate of limited partnership:
FIRST: Amendment(s): (indicate article number(s) being amended, added, or
deleted)
Article XX, Section 21.5 is deleted in its entirety, and all cross
references to such section are deleted in their entirety.
SECOND: This certificate of amendment shall be effective at the time of its
filing with the Florida Department of State.
THIRD: Signature(s)
Signature of current general partner(s):
-------------------------------------
James M. Seneff, Jr.
-------------------------------------
Robert A. Bourne
CNL REALTY CORPORATION
By:
-------------------------------------
Name:
Signature(s) of new general partner(s), if applicable: N/A
C-1
<PAGE>
Appendix D
[FORM OF OPINION]
, 1999
James M. Seneff, Jr.
Robert A. Bourne
400 East South Street
Orlando, Florida 32801
Gentlemen:
We have acted as counsel to CNL Income Fund XIII, Ltd., a Florida limited
partnership (the "Partnership") of which you are the general partners (the
"General Partners"), in connection with the proposed amendment (the "Proposed
Amendment") to the Amended and Restated Agreement of Limited Partnership of CNL
Income Fund XIII, Ltd. (the "Partnership Agreement"). The Partnership Agreement
requires that in connection with any proposed amendment to the Partnership
Agreement (other than ministerial amendments and those amendments dealing with
the transfer of a limited partner's partnership interest or the admission of
substituted or additional limited partners), the General Partners must obtain
an opinion of counsel concerning whether such proposed amendment would result
in changing the Partnership to a general partnership. The Proposed Amendment
would delete the provision in the Partnership Agreement that prohibits the
Partnership from participating in any transaction involving (i) the
acquisition, merger, conversion, or consolidation, either directly or
indirectly, of the Partnership, and (ii) the issuance of securities of any
other partnership, real estate investment trust, corporation trust or other
entity that would be created or would survive after the successful completion
of such transaction.
This opinion is furnished pursuant to the Partnership Agreement. In
rendering our opinion, we have examined and relied on the Partnership
Agreement, the Proposed Amendment, and the Certificate of Limited Partnership
of the Partnership. We have, in addition, made such other inquiries of fact and
examinations of law as we have deemed necessary for purposes of rendering this
opinion.
We are members of the Bar of the State of Florida and do not hold ourselves
out as being conversant with the laws of any jurisdiction other than those of
the State of Florida and are expressing no opinion as to the laws of any
jurisdiction other than those of the State of Florida and our opinion is so
limited.
In rendering the opinion set forth below, we have assumed: the genuineness
of all signatures on records, certificates, instruments, agreements and other
documents submitted to us for examination; the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, photostatic, facsimile, reproduced, or
conformed copies and the authenticity of the originals of such latter
documents; the accuracy and completeness of all factual representations made in
the above-referenced documents; and the legal capacity of all natural persons.
Based upon the foregoing and subject to the limitations and qualifications
hereinafter set forth, we are of the opinion that the Proposed Amendment to the
Partnership Agreement would not result in changing the Partnership to a general
partnership.
This opinion letter is based upon and limited to laws of the State of
Florida as in effect on the date of this letter and to our current knowledge of
facts in existence as of the date of this letter and material to the opinions
expressed in this letter. This opinion letter is rendered as of the date
hereof, and does not purport to analyze, evaluate or consider the legal effect
of any event, legal or factual, occurring after such date that may alter the
validity, effect or contents of this opinion, and we assume no obligation to
update the opinion set forth herein.
<PAGE>
This opinion letter is limited to the matters expressly set forth in this
letter, and no other statement or opinions should be inferred beyond the
matters expressly stated.
Except as agreed by us in writing, our opinion is solely for the benefit of
the addressees shown on the first page hereof and the limited partners of the
Partnership and may be relied upon by such parties solely for the purposes for
which it is being furnished. Without our prior written consent, this opinion
letter may not be used, circulated, quoted or otherwise referred to for any
purpose except as stated herein.
Very truly yours,
Baker & Hostetler LLP
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND XIV, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund XIV, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying Prospectus
Consent Solicitation Statement, which includes detailed discussions regarding
APF and the other Income Funds being acquired by APF. Accordingly, the
discussions in this supplement are qualified by the more expanded treatment of
these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly-owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999, and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships,which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties on a triple-net
basis, APF has the ability to offer a complete range of restaurant property
services to operators of national and regional restaurant chains, from triple-
net leasing and mortgage financing to site selection, construction management
and build-to-suit development. If APF acquires all of the Income Funds in the
Acquisition, APF expects to have total assets of approximately $1.5 billion at
the time of the consummation of the Acquisition and will be one of the largest
triple-net lease REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 2,156,521 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is uncertain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for
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trading on the NYSE. We do not know the value at which an APF Share will trade
on the NYSE upon listing. It is possible that the APF Shares will trade at
prices substantially below the exchange value. APF has, however, recently sold
$750 million of APF Shares through three public offerings. In each offering,
the offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At March 31, 1999, APF has invested all of the net offering proceeds to acquire
restaurant properties and to make mortgage loans and to pay fees and other
expenses.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the Acquisition?
There are a number of material risks and considerations that you should
consider, including:
. We are uncertain as to the value at which APF Shares will trade
following listing.
. We have material conflicts in light of our being both general partners
of the Income Funds and members of APF's Board of Directors.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. As stated below, the Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote against the
Acquisition.
Did you receive a fairness opinion in connection with APF's acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
with respect to the fairness, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the colored
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's acquisition of your
Income Fund. If you prefer, you may instead vote by telephone, following the
instructions on your consent form. If you sign and send in your consent form
and do not indicate how you want to vote, your consent form will be counted as
a vote "For" the Acquisition. If you do not vote or you abstain from voting, it
will count as a vote "Against" the Acquisition.
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<PAGE>
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2004 in an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only receive the notes if you vote "Against" the
Acquisition, and you elect to receive the notes on your consent form. You will
receive APF Shares if your Income Fund elects to be acquired in the Acquisition
and you vote "For" the Acquisition, or you vote "Against" the Acquisition and
do not affirmatively select the notes option on your consent form. In addition,
if Limited Partners in your Income Fund elect to receive notes in an amount
greater than 15% of the estimated value of APF Shares, based on the exchange
value, to be paid to your Income Fund, then APF has the right to decline to
acquire your Income Fund. The notes will not be listed on any exchange or
automated quotation system, and a market for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
the tax that you must pay will generally be based on the difference between the
value of the APF Shares you receive and the tax basis of your units. If you
elect to receive notes, your tax will be based upon your allocable share of the
gain which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Some of
the gain may be subject to the 25% rate of tax applicable to certain types of
real property gain.
We urge you to consult with your tax advisor to evaluate the taxes that will
be incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $251. To review
the tax consequences to the Limited Partners of the Income Funds in greater
detail, see pages 180 through 194 of the consent solicitation and "Federal
Income Tax Considerations" in this supplement.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds acquired by
APF may be differently constructed, located in a different geographic area or
of a different restaurant chain than the restaurant properties owned by your
Income Fund. Because the market for real estate may vary from one region of the
country to another, the change in geographic diversity may expose you to
different and greater risks than those to which you are presently exposed. For
geographic information regarding APF's and the Income Funds' restaurant
properties, see "APF's Business and The Restaurant Properties -- Business
Objectives and Strategies" and "-- The Restaurant Properties -- General" and
"Business of the Income Funds-- Description of Restaurant Properties" in the
consent solicitation.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund. This description is qualified in its entirety
by the more detailed discussion in the section entitled "Risk Factors"
contained in the consent solicitation.
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<PAGE>
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease below the exchange value upon listing.
Your Income Fund will be receiving 2,156,521 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices substantially below
the exchange value or the historical per share book value of the assets of APF.
The APF Shares have been approved for listing on the NYSE, subject to official
notice of issuance. Prior to listing, the existing APF stockholders have not
had an active trading market in which they could sell their APF Shares.
Additionally, any Limited Partners of the Income Funds who become APF
stockholders as a result of the Acquisition, will have transformed their
investment in non-tradable units into an investment in freely tradable APF
Shares. Consequently, some of these stockholders may choose to sell their APF
Shares upon listing at a time when demand for APF Shares may be relatively low.
The market price of the APF Shares may be volatile after the Acquisition, and
the APF Shares could trade at prices substantially less than the exchange value
as a result of increased selling activity following the issuance of the APF
Shares, the interest level of investors in purchasing the APF Shares after the
Acquisition and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund made $825 in distributions per $10,000 investment to you.While
historically, APF has made distributions equal to 7.625% per APF Share, based
on the exchange value, we cannot be sure that APF will be able to maintain this
level of distributions in the future. In the event that APF is unable to
maintain this level of distributions in the future, your distributions per
$10,000 investment may decrease substantially after the Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have two material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne have a different interest in the completion of the Acquisition which
may conflict with your interest as a Limited Partner of the Income Fund or with
their own positions as the general partners of your Income Fund. Second, while
we will not receive any APF Shares as a result of APF's Acquisition of your
Income Fund, we, as the general partners of your Income Fund, may be required
to pay all or a substantial portion of the Acquisition costs allocated to your
Income Fund to the extent that you or other Limited Partners of your Income
Fund vote against the Acquisition. For additional information regarding the
Acquisition costs allocated to your Income Fund, see "Comparison of Alternative
Effect on Financial Condition and Results of Operations" contained in this
supplement.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own and lease on a triple-net basis, on the date that the Acquisition
is consummated, assuming only your Income Fund was acquired as of March 31,
1999, 570 restaurant properties. The risks inherent in investing in an
operating company such as APF include that APF may invest in new restaurant
properties that are not as profitable as APF anticipated, may incur substantial
indebtedness to make future acquisitions of restaurant properties which it may
be unable to repay and may
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make mortgage loans to prospective operators of national and regional
restaurant chains which may not have the ability to repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through sale of your APF Shares, not from
liquidation proceeds, if any, from restaurant properties. Continuation of your
Income Fund would, on the other hand, permit you eventually to receive
liquidation proceeds, from the sale of the Income Fund's restaurant properties,
and your share of these sale proceeds could be higher than the amount realized
from the sale of your APF Shares or from the payments on any notes if you elect
to receive the notes.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default 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 effect 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. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from
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APF's estimates. For example, APF's gain upon the sale of loans will have been
either overstated or understated if prepayments and/or defaults are greater
than or less than anticipated. In addition, higher levels of future
prepayments, and/or increases in delinquencies or liquidations, would result in
a lower valuation of the mortgage-related securities. These adjustments would
adversely affect APF's earnings in the period in which the adjustment is made.
Such adjustments may be material if APF's estimates are significantly different
from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
March 31, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.62x and its ratio of debt-to-total assets was
28.01%. If only your Income Fund were acquired as of that date, APF's debt
service ratio would have been 3.79x and its ratio of debt-to-total assets would
have been 26.90%. Up through the time immediately prior to the consummation of
the Acquisition, as a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former Limited Partners of the Income Funds
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgages. APF
typically does not require that a third party guarantee the obligations of the
tenant or the borrower. The ability of the tenants or borrowers to pay their
obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to: (1)
national, regional and local economic conditions which may be adversely
affected by industry slowdowns, employer relocations, prevailing employment
conditions and other factors, and which may reduce consumer demand for the
products offered by
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APF's customers; (2) local real estate conditions; (3) changes or weaknesses in
specific industry segments; (4) perceptions by prospective customers of the
safety, convenience, services and attractiveness of the restaurant chain; (5)
changes in demographics, consumer tastes and traffic patterns; (6) the ability
to obtain and retain capable management; (7) changes in laws, building codes,
similar ordinances and other legal requirements, including laws increasing the
potential liability for environmental conditions existing on properties; (8)
the inability of a particular restaurant chain's computer system, or that of
its franchisor or vendors, to adequately address Year 2000 issues; (9)
increases in operating expenses; and (10) increases in minimum wages, taxes,
including income, service, real estate and other taxes, or mandatory employee
benefits.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as a stockholder, would be reduced substantially for
each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to certain adjustments that are unique to REITs, a REIT generally
must distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
For a more detailed discussion of the risks associated with the Acquisition,
see "Risk Factors" in the consent solicitation.
CONSIDERATION PAID TO INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
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The following table sets forth information regarding the estimated value of
the consideration that your Income Fund will receive in the Acquisition. The
APF Shares payable to your Income Fund will not change if APF acquires fewer
than all of the Income Funds in the Acquisition. This data assumes that none of
the Limited Partners of your Income Fund have elected to receive the notes. You
should note that the APF Shares may trade at prices substantially below the
exchange value upon listing on the NYSE.
<TABLE>
<CAPTION>
Original Limited Original Limited Estimated Estimated Value
Partner Investments Partner Investments Value of of APF Shares
Less Any Less Any Distributions Number of APF Estimated Value APF Shares per Average
Distributions of Net Sales Proceeds Shares of APF Shares Estimated after $10,000 Original
of Net Sales per 10,000 Offered to Payable to Acquisition Acquisition Limited Partner
Proceeds(1) Original Investment(1) Income Fund Income Fund Expenses Expenses Investment
- ------------------- ---------------------- ------------- --------------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$45,000,000 $10,000 2,156,521 $43,130,420 $475,000 $42,655,420 $9,479
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2004. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2004. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest. For more detailed information, see "The Acquisition" and
"Description of the Notes" in the consent solicitation.
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
<TABLE>
<CAPTION>
Pre-closing Transaction Costs
<S> <C>
Legal Fees(1)...................................... $ 24,991
Appraisals and Valuation(2)........................ 9,570
Fairness Opinions(3)............................... 30,000
Solicitation Fees(4)............................... 16,488
Printing and Mailing Fees(5)....................... 107,699
Accounting and Other Fees(6)....................... 59,596
--------
Subtotal....................................... 248,344
</TABLE>
S-8
<PAGE>
<TABLE>
<CAPTION>
Closing Transaction Costs
<S> <C>
Title, Transfer Tax and Recording Fees(7).......... 103,995
Legal Closing Fees(8).............................. 51,368
Partnership Liquidation Costs(9)................... 71,293
--------
Subtotal....................................... 226,656
--------
Total.............................................. $475,000
========
</TABLE>
--------
(1) Aggregate legal fees to be incurred by all of the Income Funds
in connection with the Acquisition is estimated to be
$312,063. Your Income Fund's pro-rata portion of these fees
was determined based on the percentage of the value of the APF
Share consideration payable to your Income Fund, based on the
exchange value, to the total value of the APF Share
consideration payable to all of the Income Funds, based on the
exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all
of the Income Funds in connection with the Acquisition were
$105,420. Your Income Fund's pro-rata portion of these fees
was determined based on number of restaurant properties in
your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason
and incurred a fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds
in connection with the Acquisition is estimated to be
$249,626. Your Income Fund's pro-rata portion of these fees
was determined based on the number of Limited Partners in your
Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the
Income Funds in connection with the Acquisition is estimated
to be $1,610,399. Your Income Fund's pro-rata portion of these
fees was determined based on the number of Limited Partners in
your Income Fund.
(6) Aggregate accounting and other fees to be incurred by the
Income Funds in connection with the Acquisition is estimated
to be $683,904. Your Income Fund's pro-rata portion of these
fees was determined based on the percentage of your Income
Fund's total assets as of March 31, 1999 to the total assets
of all of the Income Funds as of March 31, 1999.
(7) Aggregate title, transfer tax and recording fees to be
incurred by all of the Income Funds in connection with the
Acquisition is estimated to be $1,312,808. Your Income Fund's
pro-rata portion of these fees was determined based on the
percentage of the value of the APF Share consideration payable
to your Income Fund, based on the exchange value, to the total
value of the APF Share consideration payable to all of the
Income Funds, based on the exchange value.
(8) Aggregate legal closing fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to be
$648,454. Your Income Fund's pro-rata portion of these fees
was determined based on the percentage of your Income Fund's
total assets as of March 31, 1999 to the total assets of all
of the Income Funds as of March 31, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all
of the Income Funds in connection with the Acquisition is
estimated to be $895,326. Your Income Fund's pro-rata portion
of these costs was determined based on the percentage of the
value of the APF Share consideration payable to your Income
Fund, based on the exchange value, to the total value of the
APF Share consideration payable to all of the Income Funds,
based on the exchange value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
S-9
<PAGE>
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 80% or more in value of your Income Fund's
restaurant properties acquired within two years of the initial date of the
prospectus (September 1993). Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding units.
Required Amendment to the Partnership Agreement
Your Income Fund's partnership agreement includes one provision that may
prevent the successful completion of APF's Acquisition of your Income Fund.
This provision must be amended in order to successfully complete the
Acquisition. Therefore, if you vote "For" the Acquisition, you will also be
asked to vote in favor of this amendment. The proposed amendment is summarized
below:
. Amendment to Roll-Up Prohibition. Article 21 of the partnership agreement
currently provides that your Income Fund may not participate in any
transaction involving (i) the acquisition, merger, conversion or
consolidation, either directly or indirectly, of your Income Fund, and (ii)
the issuance of securities of any other partnership, real estate investment
trust, corporation, trust or other entity that would be created or would
survive after the successful completion of such transaction.
If the Limited Partners holding a majority of the units approve this
amendment to your Income Fund's partnership agreement your Income Fund, Article
21 will be deleted in its entirety.
Partnership Agreement Amendment Procedures
Pursuant to Article 13 of your Income Fund's partnership agreement, we may
propose amendments to the partnership agreement. Article 13 of the partnership
agreement requires that we furnish you with a verbatim statement of the
proposed amendment, which is attached to this Supplement as Appendix C, and to
include an opinion of our counsel regarding whether the proposed amendment
would result in changing your Income Fund to a general partnership, changing
our liability or your liability, or allowing you to take part in the control or
management of your Income Fund. The form of opinion of Baker & Hostetler LLP is
attached to this supplement as Appendix D.
Consequence of Failure to Approve the Acquisition or the Amendments
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition and the proposed
amendment to the partnership agreement, the Acquisition may not be consummated
under the terms of the partnership agreement. In such event, we plan to
continue to operate your Income Fund as a going concern and to eventually
dispose of your Income Fund's restaurant properties approximately 7 to 12 years
after they were acquired or as soon thereafter if, in our opinion, market
conditions permit, as contemplated by the terms of the partnership agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at
. We and members of APF's management intend
S-10
<PAGE>
to solicit actively your support for the Acquisition and would like to use the
special meeting to answer questions about the Acquisition and the solicitation
materials and to explain in person our reasons for recommending that you vote
"For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain their votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning on attending the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about
, 1999 and will continue until the later of (a) , 1999, a
date not less than 60 calendar days from the initial delivery of the
solicitation materials, or (b) such later date as we may select and as to which
we give you notice. At our discretion, we may elect to extend the solicitation
period. Under no circumstances will the solicitation period be extended beyond
March 31, 2000. Any consent form received by Corporate Election Services prior
to 5:00 p.m., Eastern time, on the last day of the solicitation period will be
effective provided that such consent form has been properly completed and
signed. If you fail to return a signed consent form by the end of the
solicitation period, your units will be counted as voting "Against" the
Acquisition of your Income Fund and you will receive APF Shares if your Income
Fund is acquired. If you prefer, you may instead vote by telephone, according
to the instructions on your consent form.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
S-11
<PAGE>
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the quarter
ended March 31, 1999, the aggregate amounts accrued or paid by your Income Fund
to us are shown below under "Historical Distributions Paid to the General
Partners and Affiliates" and the estimated amounts of compensation that would
have been paid had the Acquisition been in effect for the periods presented,
are shown below under "Pro Forma Distributions to be Paid to the General
Partners Following the Acquisition":
<TABLE>
<CAPTION>
Year Ended December 31, Quarter Ended
-------------------------- March 31,
1996 1997 1998 1999
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the
General Partners and Affiliates:
General Partner Distributions...... -- -- -- --
Accounting and Administration
Services.......................... $96,082 $89,910 $110,618 $30,809
Property Management Fees........... 38,785 38,626 37,430 9,544
Broker/Dealer Commissions..........
Due Diligence and Marketing Support
Fees.............................. -- -- -- --
Acquisition Fees................... -- -- -- --
Asset Management Fees.............. -- -- -- --
Real Estate Disposition Fees(1).... -- -- -- --
-------- -------- -------- -------
Total historical................. $134,867 $128,536 $148,048 $40,353
Pro Forma Distributions to be Paid to
the General Partners Following the
Acquisition:
Cash Distributions on APF Shares... -- -- -- --
Salary Compensation................ -- -- -- --
-------- -------- -------- -------
Total pro forma.................. -- -- -- --
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to certain minimum
returns to the Limited Partners. To date, no such fees have been paid since
the required minimum returns have not been made to the Limited Partners.
S-12
<PAGE>
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
contained herein under the caption "Financial Statements" and in the consent
solicitation under the caption "Summary -- Our Reasons for Supporting the
Acquisition -- Prices for Income Fund Units."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Quarter
Year Ended December 31, Ended March 31, 1999
------------------------ --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income....... $650 $806 $825 $807 $704 $156 $120
Distributions from Return of
Capital........................ -- -- -- 18 121 50 85
---- ---- ---- ---- ---- ---- ----
Total......................... $650 $806 $825 $825 $825 $206 $205
==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from certain non-cash
items. This amount is not required to be presented as a return of capital
except for purposes of this table, and the Income Fund has not treated this
amount as a return of capital for any other purpose.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses during 1999. Thus, the pro forma information regarding
the distributions to APF stockholders for the quarter ended March 31, 1999 is
not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the Acquisition
with those of several alternatives, the Acquisition is more economically
attractive to you and the other Limited Partners than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
S-13
<PAGE>
subject to certain closing conditions. Second, if your Income Fund is acquired,
all Limited Partners of your Income Fund who vote against the Acquisition will
be given the option of receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others, that we will be relieved
from certain ongoing liabilities with respect to Income Fund if it is acquired
by APF. For a further discussion of the conflicts of interest and potential
benefits of the Acquisition to us, see "Conflicts of Interest" below.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the values of the
consideration which would have been received by you and the other Limited
Partners in alternative transactions and concluded that the Acquisition is fair
based on such comparison. In addition, we believe the Acquisition is the best
way to maximize the return on your investment because of your ability to
participate in the potential appreciation of APF Shares. Since the investment
in your Income Fund is an investment in a static portfolio due to the
restrictions contained in your Income Fund's partnership agreement and limited
capital resources, your investments have less of an opportunity to appreciate.
Because APF is a growth-oriented operating company, you will have the
opportunity as an APF stockholder to participate in APF's future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinions of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinions of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., an affiliate of CNL Group, Inc., and (3) Valuation
Associates has previously performed valuation appraisals for APF. See "Reports,
Opinions and Appraisals" in the consent solicitation.
On rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to, any other
aspect of the Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition
or the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
S-14
<PAGE>
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Legg Mason's opinion also does not compare the relative merits of the
Acquisition with those of any other transaction or business strategy which were
or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and. as a going concern On the basis of these calculations, we believe that the
ultimate value of the APF Shares will exceed the going concern value and
liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Net Book Value of the Income Fund. We calculated the book value of your
Income Fund under generally accepted accounting principles, or GAAP, as of
March 31, 1999 per average $10,000 original investment. Since the calculation
of the book value was done on a GAAP basis, it is primarily based on historical
cost and, therefore, it is not indicative of the true fair market value of your
Income Fund. This figure was compared to three other figures:
(1) the value of the Income Fund if it commenced an orderly liquidation of
its investment portfolio on December 31, 1998,
(2) the value of the Income Fund if it continued to operate in accordance
with its existing partnership agreement and business plans, and
(3) the estimated value of the APF Shares, based on the exchange value, paid
to each Income Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated Value
of APF Shares
Original per Average
Limited Partner $10,000
Investments Less Going Original Limited
any Distributions GAAP Liquidation Concern Partnership
of Sales Proceeds(1) Book Value Value(2) Value(2) Investment
-------------------- ---------- ----------- -------- ----------------
<S> <C> <C> <C> <C> <C>
CNL Income Fund XIV,
Ltd. .................. 10,000 $8,724 $8,514 $9,430 $9,479
</TABLE>
- --------
(1) The Income Fund has had no distributions of net sales proceeds.
(2) Liquidation and going concern values were based on appraisals prepared by
Valuation Associates. For a complete description of the methodologies
employed by Valuation Associates, see "Reports, Opinions and Appraisals" in
the consent solicitation.
S-15
<PAGE>
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have contractual
obligations pursuant to your Income Fund's partnership agreement and state law
to assess whether the terms of the Acquisition are fair and equitable to the
Limited Partners of your Income Fund without regard to whether the Acquisition
is fair and equitable to any of the other participants, including the Limited
Partners in other Income Funds. James M. Seneff, Jr. and Robert A. Bourne act
as the individual general partners of all of the Income Funds and also as
members of the Board of Directors of APF. While Messrs. Seneff and Bourne have
sought faithfully to discharge their obligations to your Income Fund, there is
an inherent conflict of interest in serving, directly or indirectly, in a
similar capacity with respect to your Income Fund and also on APF's Board of
Directors.
Lack of Independent Representation
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We have
been the parties responsible for structuring all the terms and conditions of
the Acquisition. Legal counsel engaged to assist with the preparation of the
documentation for the Acquisition, including this consent solicitation, was
engaged by us and did not serve, or purport to serve, as legal counsel for the
Income Funds or Limited Partners. If an independent representative had been
retained for the Income Funds, the terms of the Acquisition may have been
different and possibly more favorable to the Limited Partners. In particular,
had separate representation for each of the Income Funds been arranged by us,
issues unique to the value of each of the specific Income Funds might have been
highlighted or received greater attention, resulting in adjustments to the
value assigned to the assets of such Income Funds and increasing the number of
APF Shares or notes that would be allocable to such Income Fund if acquired in
the Acquisition.
Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive two material benefits. These benefits include:
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr.
Seneff serving as Chairman of APF and Mr. Bourne serving as Vice
Chairman. Furthermore, they will be entitled to receive performance-
based incentives, including stock options, under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.lp4
. As general partners of the Income Funds, we are legally liable for all
of Income Funds liabilities to the extent that the Income Funds are
unable to satisfy such liabilities. Because the partnership agreement
for each Income Fund prohibits the Income Funds from incurring
indebtedness, the only liabilities the Income Funds have are liabilities
with respect to their ongoing bus ongoing business operations. In the
event that one or more Income Funds are acquired by APF, we would be
relieved of our legal obligation to satisfy the liabilities of the
acquired Income Fund or Income Funds.
S-16
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Certain Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund. If
your Income Fund is acquired by APF, and you have voted "For" the Acquisition,
you will receive APF Shares. If you have voted "Against" the Acquisition but
your Income Fund is acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under certain circumstances, even
if APF were to make the same level of distributions as your Income Fund, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you. For certain other differences attributable to APF's status as a REIT,
see " Taxation of APF" and " Taxation of Stockholders Taxable Domestic
Stockholders" in the consent solicitation.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain and loss based on the
exchange value, for an average $10,000 original
S-17
<PAGE>
Limited Partner investment in your Income Fund, is set forth in the table below
for those Limited Partners subject to federal income taxation.
<TABLE>
<CAPTION>
Estimated Gain/(Loss)
per Average $10,000
Original Limited
Partner Investment(1)
---------------------
<S> <C>
CNL Income Fund XIV, Ltd. ................................ $251
</TABLE>
- --------
(1) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be at prices significantly below the exchange value.
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one more individuals or entities in exchange for the stock of that corporation,
and (2) immediately after the exchange, such individuals or entities are in
control of the corporation. For purposes of section 351(a), control is defined
as the ownership of stock possessing at least 80 percent of the total combined
voting power of all classes of stock entitled to vote and at least 80 percent
of the total number of shares of all other classes of stock of the corporation.
APF has represented to Shaw Pittman, APF's tax counsel, that, following the
Acquisition, the Limited Partners of the Income Funds will not own stock
possessing at least 80 percent of the total combined voting power of all
classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if any,
assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2004, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, and that is assumed or taken subject to by
the Operating Partnership. The exact amount of the gain to be recognized by
your Income Fund in the year of the Acquisition will also vary depending upon
the decisions of the Limited Partners to receive APF Shares or notes.
S-18
<PAGE>
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses that
you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the notes may recognize gain in the year of the
Acquisition despite the fact that they will not receive cash with which to pay
the tax on the gain. Such Limited Partners will adjust the basis of the notes
as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes. See "-- Tax Consequences of Liquidation and
Termination of Your Income Fund" below.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition, including gain or loss resulting from the Acquisition. If
your taxable year is not the calendar year, you could be required to recognize
as income in a single taxable year your share of your Income Fund's income
attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units, and your holding period
for the notes for purposes of determining capital gain or loss from the
disposition of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17)
S-19
<PAGE>
or (20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
For a discussion of the taxation of APF, see "Federal Income Tax
Considerations -- Taxation of APF" in the consent solicitation.
S-20
<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 Adjustment 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 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 2,307,364 1,391,466 8,137 (2,450,663)(b)(c)
Interest and
Other Income..... 2,214,763 0 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 0 1,095,269 2,563,714 1,323,577 64,186 (377,734)(c)
Management and
Advisory Fees.... 697,364 0 697,364 0 0 611,196 (1,308,560)(f)
Fees to Related
Parties.......... 0 0 0 23,326 292,575 0 (292,786)(g)
Interest
Expense.......... 0 0 0 50,730 0 4,769,268 0
State Taxes...... 235,208 0 235,208 0 0 0 0
Depreciation--
Other............ 0 0 0 39,581 26,238 0 0
Depreciation--
Property......... 1,548,813 349,465(a) 1,898,278 0 0 0 0
Amortization..... 7,368 0 7,368 0 0 0 535,175 (h)
Transaction
Costs............ 125,926 0 125,926 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
Total Expenses.. 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650 (1,443,905)
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest and 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) $ (944,690)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 0 17,271 0 0 0 0
Gain on Sale of
Properties....... 0 0 0 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 (215,797) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
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) (944,690)
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 127,496 48,017 73,166 (248,679)
----------- ---------- ----------- ---------- ---------- ---------- -----------
Net Earnings
(Losses)......... $10,490,297 $1,989,688 $12,479,985 $ (195,278) $ (73,545) $ (129,428) $(1,193,369)
=========== ========== =========== ========== ========== ========== ===========
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund XIV, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ----------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $14,523,161 $ 905,971 $ 15,926 (j) $15,445,058
Fees............. 1,256,304 0 (27,872)(k) 1,228,432
Interest and
Other Income..... 7,687,325 10,520 0 7,697,845
------------ ----------- ------------------ ------------
Total Revenue... $23,466,790 $916,491 $ (11,946) $24,371,335
Expenses:
General and
Administrative... 4,669,012 61,001 (32,125)(l),(m) 4,697,888
Management and
Advisory Fees.... 0 9,544 (9,544)(n) 0
Fees to Related
Parties.......... 23,115 0 0 23,115
Interest
Expense.......... 4,819,998 0 0 4,819,998
State Taxes...... 235,208 30,354 8,796 (o) 274,358
Depreciation--
Other............ 65,819 0 0 65,819
Depreciation--
Property......... 1,898,278 102,595 25,305 (p) 2,026,178
Amortization..... 542,543 1,331 0 543,874
Transaction
Costs............ 125,926 33,175 0 159,101
------------ ----------- ------------------ ------------
Total Expenses.. 12,379,899 238,000 (7,568) 12,610,331
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest and Gain
on Sale of
Properties, and
Provision for
Losses on
Properties....... $11,086,891 $ 678,491 $ (4,378) $11,761,004
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 93,686 (5,669)(q) 105,288
Gain on Sale of
Properties....... 0 0 0 0
Provision For
Loss on
Properties....... (215,797) (60,882) 0 (276,679)
------------ ----------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 10,888,365 711,295 (10,047) 11,589,613
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ----------- ------------------ ------------
Net Earnings
(Losses)......... $10,888,365 $ 711,295 $ (10,047) $11,589,613
============ =========== ================== ============
</TABLE>
S-21
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
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
============ =========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 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 .. 50.03 n/a n/a n/a n/a n/a n/a
============ =========== ============ ========== ========== ============ ===========
Weighted average
units
outstanding
during period... n/a n/a n/a n/a n/a n/a n/a
============ =========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,401 n/a 37,347,401 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 n/a 37,348,464 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... 14,237,405 n/a n/a n/a n/a n/a n/a
Cash
distributions
declared per
$10,000
Investment...... 191 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 $ -- $ -- $ -- $ 0
Mortgages/notes
receivable...... $ 41,269,740 0 $ 41,269,740 $ -- $ -- $247,896,287 $ 0
Receivables,
net............. $ 548,862 0 $ 548,862 $7,141,967 $5,457,493 $ 1,969,339 (148,629)(w)
Investment
in/due from
joint ventures.. $ 1,083,564 0 $ 1,083,564 $ -- $ -- $ -- 0
Total assets.... $708,964,145 $33,656,518(u) $742,350,663 $8,223,820 $6,308,406 $264,700,433 $31,948,171 (v1),(w)
Total
liabilities/minority
interest........ $ 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 $32,368,541 (v1),(x)
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund XIV, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- ------------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 542 57 n/a 599
============== =========== ==================== ==================
Earnings per
share/unit...... $ n/a 0.16 $ n/a $ 0.25
============== =========== ==================== ==================
Book value per
share/unit...... $ n/a $ 8.72 $ n/a $ 16.42
============== =========== ==================== ==================
Dividends per
share/unit...... $ n/a $ 0.21 $ n/a $ n/a
============== =========== ==================== ==================
Ratio of
Earnings to
Fixed Charges .. n/a n/a n/a 3.27x
============== =========== ==================== ==================
Weighted average
units
outstanding
during period... n/a 4,500,000 n/a n/a
============== =========== ==================== ==================
Weighted average
shares
outstanding
during period... 43,497,401 n/a 2,132,770 45,630,171 (r)
============== =========== ==================== ==================
Shares
outstanding..... 43,498,464 n/a 2,132,770 45,631,234
============== =========== ==================== ==================
Cash
distributions
declared:....... n/a 928,130 n/a $ 19,707,735 (s)
==================
Cash
distributions
declared per
$10,000
Investment...... n/a 206 n/a $ 216 (t)
==================
Balance sheet
data:
Real estate
assets, net..... $ 647,547,023 $33,621,962 $7,615,628 (v2) $ 688,784,613
Mortgages/notes
receivable...... $ 289,166,027 $ -- $ 0 $ 289,166,027
Receivables,
net............. $ 14,969,032 $ 36,238 $ (24,708)(y) $ 14,980,562
Investment
in/due from
joint ventures.. $ 1,083,564 $ 3,863,338 $1,072,914 (v2) $ 6,019,816
Total assets.... $1,053,531,493 $40,323,553 $3,371,808 (v2),(y) $1,097,226,854
Total
liabilities/minority
interest........ 346,929,801 $ 1,064,664 $ (24,708)(y) $ 347,969,757
Total equity.... $ 706,601,692 $39,258,889 $3,396,516 (v2) $ 749,257,097
</TABLE>
S-22
<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 Advisor,
the CNL Restaurant Financial Services Group and the Income Fund:
<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 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
</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>
(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)
<TABLE>
<S> <C>
Amortization of goodwill........................................ $535,175
</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 $15,926 in accrued rental income resulting from the straight-
lining of scheduled rent increases throughout the lease terms for the
leases acquired from the Income Fund as if the leases had been acquired on
January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income Fund:
<TABLE>
<S> <C>
Management fees................................................ $ (9,544)
Reimbursement of administrative costs.......................... (18,328)
--------
$(27,872)
========
</TABLE>
S-23
<PAGE>
(l) Represents the elimination of $18,328 in administrative costs reimbursed by
the Income Fund to the Advisor.
(m) Represents savings of $13,797 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 $9,544 in management fees by the Income Fund
to the Advisor.
(o) Represents additional state income taxes of $8,796 resulting from assuming
that acquisitions of properties that had been operational when APF acquired
them from January 1, 1999 through May 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 Fund 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 $25,305 as a result of
adjusting the historical basis of the real estate wholly owned by the
Income Fund to fair value as a result of accounting for the Acquisition of
the Income Fund under the purchase accounting method. The adjustment to the
basis of the buildings is being depreciated using the straight-line method
over the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $5,669 as a
result of adjusting the historical basis of the real estate owned by the
Income Fund, indirectly through joint venture or tenancy in common
arrangements, to fair value as a result of accounting for the Acquisition
of the Income Fund under the purchase accounting method. The adjustment to
the basis of the buildings owned indirectly by the Income Fund is being
depreciated using the straight-line method over the remaining useful lives
of the properties.
(r) Common shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 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 Fund using the purchase
accounting method.
S-24
<PAGE>
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Shares Offered.......... 3,800,000 2,350,000 2,132,770.25 8,282,770.25
Exchange Value.......... $ 20 $ 20 $ 20 $ 20
----------- ----------- ------------ ------------
Share Consideration..... $76,000,000 $47,000,000 $ 42,655,405 $165,655,405
Cash Consideration...... -- -- 475,000 475,000
APF Transaction Costs... 4,896,322 3,027,989 2,778,689 10,703,000
----------- ----------- ------------ ------------
Total Purchase Price... $80,896,322 $50,027,989 $ 45,909,094 $176,833,405
----------- ----------- ------------ ------------
Allocation of Purchase
Price:
Net Assets--Historical.. $ 7,141,252 $10,006,878 $ 39,258,889 $ 56,407,019
Purchase Price
Adjustments:
Land and buildings on
operating leases...... 6,067,515 6,067,515
Net investment in
direct financing
leases................ 1,548,113 1,548,113
Investment in joint
ventures.............. 1,072,914 1,072,914
Accrued rental income.. (1,987,635) (1,987,635)
Intangibles and other
assets................ (2,792,876) (50,702) (2,843,578)
Goodwill*.............. 42,813,987 -- 42,813,987
Excess purchase price.. 73,755,070 -- -- 73,755,070
----------- ----------- ------------ ------------
Total Allocation....... $80,896,322 $50,027,989 $ 45,909,094 $176,833,405
=========== =========== ============ ============
</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 pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,755,070 was
expensed at March 31, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations". Goodwill of 42,813,987 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.. 73,755,070
Goodwill for CFC (Intangibles and other assets).. 42,813,987
CFC/CFS Org Costs/Other Assets................... 2,792,876
Cash to pay APF transaction costs................ 7,924,311
APF Common Stock................................. 61,500
APF APIC......................................... 122,938,500
(To record acquisition of CFA, CFS and CFC)
2. Partners Capital............................... 39,258,889
Land and buildings on operating leases........... 6,067,515
Net investment in direct financing leases........ 1,548,113
Investment in joint ventures..................... 1,072,914
Accrued rental income............................ 1,987,635
Intangibles and other assets..................... 50,702
Cash to pay APF Transaction costs................ 2,778,689
Cash consideration to Income Fund................ 475,000
APF Common Stock................................. 21,328
APF APIC......................................... 42,634,077
(To record acquisition of Income Fund)
</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 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.
(y) Represents the elimination by the Income Fund of $24,708 in related party
payables recorded as receivables by the Advisor.
S-25
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND XIV, LTD.
The following table sets forth certain financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
XIV, Ltd." in this supplement.
<TABLE>
<CAPTION>
Quarter Ended
March 31, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 1,010,177 $ 1,062,980 $ 3,831,810 $ 4,268,693 $ 4,503,039 $ 4,406,707 $ 3,371,695
Net income (2).......... 711,295 972,288 3,199,087 3,665,940 3,916,329 3,751,237 2,932,075
Cash distributions
declared............... 928,130 928,130 3,712,520 3,712,520 3,712,522 3,628,130 2,850,554
Net income per unit
(2).................... 0.16 0.21 0.70 0.81 0.86 0.83 0.66
Cash distributions
declared per unit...... 0.21 0.21 0.83 0.83 0.83 0.81 0.65
GAAP book value per
unit................... 8.72 8.90 8.77 8.89 8.90 8.85 9.06
Weighted average number
of Limited Partner
units outstanding...... 4,500,000 4,500,000 4,500,000 4,500,000 4,500,000 4,500,000 4,383,150
<CAPTION>
March 31, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $40,323,553 $41,173,203 $40,538,159 $40,984,624 $41,045,849 $40,838,104 $40,866,591
Total partners'
capital................ 39,258,889 40,033,315 39,475,724 39,989,157 40,035,737 39,831,930 39,708,823
</TABLE>
- --------
(1) Revenues include equity in earnings of the joint ventures and adjustments
to accrued rental income due to the tenants of certain restaurant
properties filing for bankruptcy.
(2) Net income for the quarter ended March 31, 1999, includes $60,882 for a
provision for loss on building. Net income for the quarter ended March 31,
1998, includes $70,798 from a gain on sale of land. Net income for the year
ended December 31, 1998, includes $37,155 for a provision for loss on
building and $112,206 from gains on sales of land and building. Net income
for the year ended December 31, 1995, includes $66,518 from loss on sale of
land.
S-26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CNL INCOME FUND XIV, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
September 25, 1992, to acquire for cash, either directly or through joint
venture arrangements, both newly constructed and existing restaurants, as well
as properties upon which restaurants were to be constructed, which are leased
primarily to operators of national and regional fast-food and family-style
restaurant chains. The leases are triple-net leases, with the lessee
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of 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.
S-27
<PAGE>
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.
S-28
<PAGE>
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.
S-29
<PAGE>
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
S-30
<PAGE>
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
S-31
<PAGE>
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.
S-32
<PAGE>
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
S-33
<PAGE>
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
S-34
<PAGE>
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.
S-35
<PAGE>
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.
S-36
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998...... F-1
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998.................................................................... F-2
Condensed Statements of Partner's Capital for the Quarter Ended March 31,
1998 and for the Year Ended December 31, 1998........................... F-3
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998................................................................ F-4
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998........................................................... F-5
Report of Independent Accountants........................................ F-7
Balance Sheets as of December 31, 1998 and 1997.......................... F-8
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-9
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-10
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-12
Unaudited Pro Forma Financial Information................................ F-23
Unaudited Pro Forma Balance Sheet as of March 31, 1999................... F-24
Unaudited Pro Forma Statement of Earnings for the Quarter Ended March 31,
1999.................................................................... F-26
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998.................................................................... F-28
Unaudited Pro Forma Statement of Cash Flows for the Quarter Ended March
31, 1999................................................................ F-30
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................ F-32
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements.............................................................. F-34
</TABLE>
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
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-1
<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-2
<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-3
<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-4
<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-5
<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. 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-6
<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-7
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
building.............................................. $26,509,264 $25,217,725
Net investment in direct financing leases.............. 7,300,102 9,041,485
Investment in joint ventures........................... 3,813,175 3,271,739
Cash and cash equivalents.............................. 949,056 1,285,777
Restricted cash........................................ -- 318,592
Receivables, less allowance for doubtful accounts of
$1,105 in 1998........................................ 62,824 19,912
Prepaid expenses....................................... 8,389 7,915
Organization costs, less accumulated amortization of
$10,000 and $8,599.................................... -- 1,401
Accrued rental income less allowance for doubtful
accounts of $12,622 and $6,295........................ 1,895,349 1,820,078
----------- -----------
$40,538,159 $40,984,624
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 2,577 $ 10,258
Accrued and escrowed real estate taxes payable......... 18,198 19,570
Distributions payable.................................. 928,130 928,130
Due to related parties................................. 25,432 7,853
Rents paid in advance and deposits..................... 88,098 29,656
----------- -----------
Total liabilities.................................. 1,062,435 995,467
Partners' capital...................................... 39,475,724 39,989,157
----------- -----------
$40,538,159 $40,984,624
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $2,792,931 $2,872,283 $2,953,895
Adjustments to accrued rental income....... (277,319) -- --
Earned income from direct financing
leases.................................... 844,343 1,017,627 1,026,616
Contingent rental income................... 63,776 21,617 7,014
Interest and other income.................. 90,425 47,287 56,377
---------- ---------- ----------
3,514,156 3,958,814 4,043,902
---------- ---------- ----------
Expenses:
General operating and administrative....... 168,184 154,654 162,163
Professional services...................... 34,309 29,746 24,138
Bad debt expense........................... -- 10,500 --
Management fees to related parties......... 37,430 38,626 38,785
Real estate taxes.......................... 17,435 7,192 3,426
State and other taxes...................... 22,498 21,874 18,109
Loss on termination of direct financing
lease..................................... 21,873 -- --
Depreciation and amortization.............. 380,814 340,161 340,089
Transaction costs.......................... 25,231 -- --
---------- ---------- ----------
707,774 602,753 586,710
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Gain on Land and Building from
Right of Way Taking, Gain on Sale of Land
and Building, and Provision for Loss on
Building................................... 2,806,382 3,356,061 3,457,192
Equity in Earnings of Joint Ventures........ 317,654 309,879 459,137
Gain on Land and Building from Right of Way
Taking..................................... 41,408 -- --
Gain on Sale of Land and Building........... 70,798 -- --
Provision for Loss on Building.............. (37,155) -- --
---------- ---------- ----------
Net Income.................................. $3,199,087 $3,665,940 $3,916,329
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 31,093 $ 36,659 $ 39,163
Limited partners........................... 3,167,994 3,629,281 3,877,166
---------- ---------- ----------
$3,199,087 $3,665,940 $3,916,329
========== ========== ==========
Net Income Per Limited Partner Unit......... $ 0.70 $ 0.81 $ 0 .86
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding.......................... 4,500,000 4,500,000 4,500,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $ 69,818 $45,000,000 $ (6,710,883) $ 6,855,940 $(5,383,945) $39,831,930
Distributions to
limited
partners ($0.83 per
limited partner
unit)................. -- -- -- (3,712,522) -- -- (3,712,522)
Net income............. -- 39,163 -- -- 3,877,166 -- 3,916,329
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 108,981 45,000,000 (10,423,405) 10,733,106 (5,383,945) 40,035,737
Distributions to
limited
partners ($0.83 per
limited partner
unit)................. -- -- -- (3,712,520) -- -- (3,712,520)
Net income............. -- 36,659 -- -- 3,629,281 -- 3,665,940
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 145,640 45,000,000 (14,135,925) 14,362,387 (5,383,945) 39,989,157
Distributions to
limited
partners ($0.83 per
limited partner
unit)................. -- -- -- (3,712,520) -- -- (3,712,520)
Net income............. -- 31,093 -- -- 3,167,994 -- 3,199,087
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $176,733 $45,000,000 $(17,848,445) $17,530,381 $(5,383,945) $39,475,724
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............. $ 3,391,042 $ 3,501,064 $ 3,572,793
Distributions from joint ventures...... 343,684 308,220 340,299
Cash paid for expenses................. (293,428) (243,326) (250,885)
Interest received...................... 73,246 40,232 44,089
----------- ----------- -----------
Net cash provided by operating
activities........................... 3,514,544 3,606,190 3,706,296
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
building.............................. 1,606,702 -- --
Proceeds received from right of way
taking................................ 41,408 318,592 --
Additions to land and buildings on
operating leases...................... (605,712) -- --
Investment in direct financing
leases................................ (931,237) -- --
Investment in joint ventures........... (568,498) (121,855) (7,500)
Return of capital from joint venture... -- 51,950 --
Decrease (increase) in restricted
cash.................................. 318,592 (318,592) --
----------- ----------- -----------
Net cash used in investing
activities........................... (138,745) (69,905) (7,500)
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners...... (3,712,520) (3,712,520) (3,712,522)
----------- ----------- -----------
Net cash used in financing
activities........................... (3,712,520) (3,712,520) (3,712,522)
----------- ----------- -----------
Net Decrease in Cash and Cash
Equivalents........................... (336,721) (176,235) (13,726)
Cash and Cash Equivalents at Beginning
of Year............................... 1,285,777 1,462,012 1,475,738
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year.................................. $ 949,056 $ 1,285,777 $ 1,462,012
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................ $ 3,199,087 $ 3,665,940 $ 3,916,329
----------- ----------- -----------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Bad debt expense...................... -- 10,500 --
Loss on termination of direct
financing lease...................... 21,873 -- --
Depreciation.......................... 378,381 337,180 337,181
Amortization.......................... 2,433 2,981 2,908
Equity in earnings of joint ventures,
net of distributions................. 26,030 (1,659) (118,889)
Gain on land and building from right
of way taking........................ (41,408) -- --
Gain on sale of land and building..... (70,798) -- --
Provision for loss on building........ 37,155 -- --
Decrease in net investment in direct
financing leases..................... 82,359 83,787 74,798
Increase in receivables............... (38,232) (6,935) (13,946)
Decrease (increase) in prepaid
expenses............................. (474) 328 (4,802)
Increase in accrued rental income..... (148,845) (471,287) (491,221)
Increase (decrease) in accounts
payable and accrued expenses......... (9,038) 12,017 (8,408)
Increase (decrease) in due to related
parties.............................. 17,579 6,202 (5,218)
Increase (decrease) in rents paid in
advance and deposits................. 58,442 (32,864) 17,564
----------- ----------- -----------
Total adjustments.................... 315,457 (59,750) (210,033)
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,514,544 $ 3,606,190 $ 3,706,296
=========== =========== ===========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid at
December 31........................... $ 928,130 $ 928,130 $ 928,130
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund XIV, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to their fair
value. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
best estimate of net cash flows expected to be generated from its properties
and the need for asset impairment write downs.
F-12
<PAGE>
CNL INCOME FUND XIV , LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership continues to pursue collection of such amounts. If amounts are
subsequently determined to be uncollectible, the corresponding receivable and
allowance for doubtful accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership accounts for its interests in
Attalla Joint Venture, Wood-Ridge Real Estate Joint Venture, Salem Joint
Venture, Melbourne Joint Venture, and CNL Kingston Joint Venture using the
equity method since the Partnership shares control with affiliates which have
the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at
commercial banks and money market funds (some of which are backed by
government securities). Cash equivalents are stated at cost plus accrued
interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institution with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Organization Costs--Organization costs were amortized over five years using
the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs are netted against partners'
capital and represent a reduction of Partnership equity and a reduction in the
basis of each partner's investment.
Use of Estimates--The general partners of the Partnership have made a
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These
reclassifications had no effect on partners' capital or net income.
2. Leases:
The Partnership leases its land or land and buildings primarily to
operators of national and regional fast-food and family-style restaurants. The
leases are accounted for under the provisions of Statement of Financial
Accounting Standards No. 13, "Accounting for Leases." Some of the leases are
classified as operating leases
F-13
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
and some of the leases have been classified as direct financing leases. For the
leases classified as direct financing leases, the building portions of the
property leases are accounted for as direct financing leases while the land
portions of the majority of the leases are operating leases. Substantially all
leases are for 15 to 20 years and provide for minimum and contingent rentals.
In addition, the tenant pays all property taxes and assessments, fully
maintains the interior and exterior of the building and carries insurance
coverage for public liability, property damage, fire and extended coverage. The
lease options generally allow tenants to renew the leases for two to five
successive five-year periods subject to the same terms and conditions as the
initial lease. Most leases also allow the tenant to purchase the property at
fair market value after a specified portion of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................ $16,195,936 $16,425,914
Buildings....................................... 12,024,577 10,087,524
----------- -----------
28,220,513 26,513,438
Less accumulated depreciation................... (1,674,094) (1,295,713)
----------- -----------
26,546,419 25,217,725
Less allowance for loss on building............. (37,155) --
----------- -----------
$26,509,264 $25,217,725
=========== ===========
</TABLE>
During the year ended December 31, 1998, the Partnership sold its property
in Madison, Alabama and two properties in Richmond, Virginia, to third parties
for a total of $1,667,462 and received net sales proceeds of $1,606,702,
resulting in a total gain of $70,798 for financial reporting purposes. These
properties were originally acquired by the Partnership in 1993 and 1994, and
had costs totalling approximately $1,393,400, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold these
properties for a total of approximately $213,300 in excess of their original
purchase prices.
In addition, in April 1998, the Partnership reached an agreement to accept
$360,000 for the property in Riviera Beach, Florida, which was taken through a
right of way taking in December 31, 1997. The Partnership had received
preliminary sales proceeds of $318,592 as of December 31, 1997. Upon agreement
of the final sales price of $360,000, and receipt of the remaining sales
proceeds of $41,408, the Partnership recognized a gain of $41,408 for financial
reporting purposes. This property was originally acquired by the Partnership in
1994 and had a cost of approximately $276,400, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold this
property for a total of approximately $83,600 in excess of its original
purchase price.
In October 1998, the Partnership reinvested approximately $1,537,000 of the
net sales proceeds it received from the sales of the properties in Richmond,
Virginia and the right of way taking of the property in Riviera Beach, Florida,
and a portion of the net sales proceeds it received from the sale of the
property in Madison, Alabama, in a property located in Fayetteville, North
Carolina.
At December 31, 1998, the Partnership recorded a provision for loss on
building in the amount of $37,155 for financial reporting purposes relating to
a Long John Silver's Property. The tenant of this Property filed for
F-14
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
bankruptcy and ceased payment of rents under the terms of its lease agreement.
The allowance represents the difference between the carrying value of the
Property at December 31, 1998 and the estimated net realizable value for the
Property.
Generally, the leases provide for escalating guaranteed minimum rents
throughout the lease term. Income from these scheduled rent increases is
recognized on a straight-line basis over the terms of the leases. For the years
ended December 31, 1998, 1997, and 1996, the Partnership recognized $148,845
(net of $6,327 in reserves and $277,319 in write-offs), $471,287 (net of $6,295
in reserves), and $491,221, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 2,486,272
2000.......................................................... 2,538,562
2001.......................................................... 2,557,759
2002.......................................................... 2,615,117
2003.......................................................... 2,632,784
Thereafter.................................................... 27,438,256
-----------
$40,268,750
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Minimum lease payments receivable.............. $14,282,003 $ 18,621,827
Estimated residual values...................... 2,373,313 2,842,002
Less unearned income........................... (9,355,214) (12,422,344)
----------- ------------
Net investment in direct financing leases...... $ 7,300,102 $ 9,041,485
=========== ============
</TABLE>
F-15
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 898,054
2000.......................................................... 899,947
2001.......................................................... 902,770
2002.......................................................... 911,239
2003.......................................................... 914,901
Thereafter.................................................... 9,755,092
-----------
$14,282,003
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
In January 1998, the Partnership sold its property in Madison, Alabama, for
which the building portion had been classified as a direct financing lease. In
connection therewith, the gross investment (minimum lease payments receivable
and the estimated residual value) and unearned income relating to the building
were removed from the accounts (see Note 3).
In June 1998, four of the Partnership's leases with Long John Silver's, Inc.
were rejected in connection with the tenant filing for bankruptcy. As a result,
the Partnership reclassified these assets from net investment in direct
financing leases to land and buildings on operating leases. In accordance with
Statement of Financial Accounting Standards No. 13, "Accounting for Leases," in
June 1998, the Partnership recorded the reclassified assets at the lower of
original cost, present fair value, or present carrying amount, which resulted
in a loss on termination of direct financing lease of $21,873 for financial
reporting purposes.
5. Investment in Joint Ventures:
The Partnership owns a 50 percent, a 72.2% and a 50 percent interest in the
profits and losses of Attalla Joint Venture, Salem Joint Venture and Wood-Ridge
Real Estate Joint Venture, respectively. The remaining interests in these joint
ventures are held by affiliates of the Partnership which have the same general
partners.
In January 1997, Wood-Ridge Real Estate Joint Venture reinvested $502,598 of
the remaining net sales proceeds, from the 1996 sales of two properties, in a
Taco Bell property in Anniston, Alabama. During the year ended December 31,
1997, the Partnership and the other joint venture partner had each received
approximately $52,000, representing a return of capital, for the remaining
uninvested net sales proceeds. As of December 31, 1998, the Partnership owned a
50 percent interest in the profits and losses of this joint venture.
In September 1997, the Partnership entered into a joint venture arrangement,
CNL Kingston Joint Venture, with an affiliate of the general partners, to
construct and hold one restaurant property. In connection therewith, the
Partnership contributed amounts to CNL Kingston Joint Venture to fund
construction costs relating to the property owned by the joint venture. As of
December 31, 1998, the Partnership owned a 39.94% interest in the profits and
losses of the joint venture. The Partnership accounts for its investment in
this joint venture under the equity method since the Partnership shares control
with an affiliate.
F-16
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In April 1998, the Partnership entered into a joint venture arrangement,
Melbourne Joint Venture, with an affiliate of the general partners, to
construct and hold one restaurant property, at a total cost of $1,052,552.
During 1998, the Partnership contributed amounts to purchase land and pay for
construction costs relating to the joint venture and has agreed to contribute
additional amounts in 1999 for additional construction costs. As of December
31, 1998, the Partnership owned a 50 percent interest in the profits and losses
of this joint venture. When funding is complete, the Partnership expects to
have an approximate 50 percent interest in the profits and losses of the joint
venture. The Partnership accounts for its investment in this joint venture
under the equity method since the Partnership shares control with an affiliate.
As of December 31, 1998, Attalla Joint Venture, Salem Joint Venture, CNL
Kingston Joint Venture, and Melbourne Joint Venture each owned and leased one
property, and Wood-Ridge Real Estate Joint Venture owned and leased six
properties, to operators of fast-food or family-style restaurants. The
following presents the joint ventures' condensed financial information at
December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................ $6,913,765 $6,008,240
Net investment in direct financing lease......... 360,790 364,479
Cash............................................. 87,922 13,842
Receivables...................................... 47,545 2,571
Accrued rental income............................ 194,526 150,621
Other assets..................................... 1,055 1,257
Liabilities...................................... 171,590 231,061
Partners' capital................................ 7,434,013 6,309,949
Revenues......................................... 750,147 712,004
Net income....................................... 615,127 588,835
</TABLE>
The Partnership recognized income totalling $317,654, $309,879, and $459,137
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
6. Restricted Cash:
In December 1997, the Partnership received preliminary sales proceeds of
$318,592 for the property in Riviera Beach, Florida which was taken through a
right of way taking. In October 1998, the Partnership reinvested these proceeds
in a property in Fayetteville, North Carolina (see Note 3).
7. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their invested capital contributions (the "Limited Partners' 10% Return").
Generally, net sales proceeds from the sales of properties not in
liquidation of the Partnership, to the extent distributed, will be distributed
first to the limited partners in an amount sufficient to provide them with
F-17
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
their Limited Partners' 10% Return, plus the return of their adjusted capital
contributions. The general partners will then receive, to the extent previously
subordinated and unpaid, a one percent interest in all prior distributions of
net cash flow and a return of their capital contributions. Any remaining sales
proceeds will be distributed 95 percent to the limited partners and five
percent to the general partners. Any gain from a sale of a property not in
liquidation of the Partnership is, in general, allocated in the same manner as
net sales proceeds are distributable. Any loss from the sale of a property is,
in general, allocated first, on a pro rata basis, to partners with positive
balances in their capital accounts, and thereafter, 95 percent to the limited
partners and five percent to the general partners.
Generally, net sales proceeds from a sale of properties, in liquidation of
the Partnership will be used in the following order: i) first to pay and
discharge all of the Partnership's liabilities to creditors, ii) second, to
establish reserves that may be deemed necessary for any anticipated or
unforeseen liabilities or obligations of the Partnership, iii) third, to pay
all of the Partnership's liabilities, if any, to the general and limited
partners, iv) fourth, after allocations of net income, gains and/or losses, to
the partners with positive capital account balances, in proportion to such
balances, up to amounts sufficient to reduce such positive balances to zero,
and v) thereafter, any funds remaining shall then be distributed 95 percent to
the limited partners and five percent to the general partners.
During each of the years ended December 31, 1998 and 1997, the Partnership
declared distributions to the limited partners of $3,712,520 and during the
year ended December 31, 1996, the Partnership declared distributions to the
limited partners of $3,712,522. No distributions have been made to the general
partners to date.
F-18
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
8. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................ $3,199,087 $3,665,940 $3,916,329
Depreciation for tax reporting
purposes in excess of depreciation
for financial reporting purposes.... (77,202) (130,766) (130,766)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................ 82,359 83,787 74,798
Gain on sale of land and building for
tax reporting purposes in excess of
gain for financial reporting
purposes............................ 94,442 -- --
Gain on land and building from right
of way taking deferred for tax
reporting purposes.................. (41,408) -- --
Allowance for loss on building....... 37,155 -- --
Equity in earnings of joint ventures
for financial reporting purposes
less than (in excess of) equity in
earnings of joint ventures for tax
reporting purposes.................. 35,645 3,109 (174,253)
Capitalization of transaction costs
for tax reporting purposes.......... 25,231 -- --
Allowance for doubtful accounts...... 1,105 -- --
Accrued rental income................ (148,845) (471,287) (491,221)
Loss on lease termination of direct
financing lease..................... 21,873 -- --
Rents paid in advance................ 53,442 (32,864) 17,564
Other................................ 1,034 (21,988) 23,878
---------- ---------- ----------
Net income for federal income tax
purposes............................ $3,283,918 $3,095,931 $3,236,329
========== ========== ==========
</TABLE>
9. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of directors of CNL Fund
Advisors, Inc. During the years ended December 31, 1998, 1997, and 1996, CNL
Fund Advisors, Inc. (hereinafter referred to as the "Affiliate") performed
certain services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate a management fee of one percent of the sum of gross
revenues from properties wholly owned by the Partnership and the Partnership's
allocable share of gross revenues from joint ventures. The management fee,
which will not exceed fees which are competitive for similar services in the
same geographic area, may or may not be taken, in whole or in part as to any
year, in the sole discretion of the
F-19
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Affiliate. All or any portion of the management fee not taken as to any fiscal
year shall be deferred without interest and may be taken in such other fiscal
year as the Affiliates shall determine. The Partnership incurred management
fees of $37,430, $38,626, and $38,785 for the years ended December 31, 1998,
1997, and 1996, respectively.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties, based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the net sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. The payment of the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate Limited Partners' 10%
Return plus their invested capital contributions. No deferred, subordinated
real estate disposition fees have been incurred since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $110,618, $89,910, and $96,082 for the
years ended December 31, 1998, 1997, and 1996, respectively, for such services.
During 1998, the Partnership acquired a property for a purchase price of
approximately $1,537,000 from CNL First Corp., an affiliate of the general
partners. CNL First Corp. had purchased and temporarily held title to this
property in order to facilitate the acquisition of the property by the
Partnership. The purchase price paid by the Partnership represented the costs
incurred by CNL First Corp. to acquire and carry the property, including
closing costs.
The due to related parties at December 31, 1998 and 1997, totalled $25,432
and $7,853, respectively.
10. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, or affiliated groups of lessees, each representing more
than ten percent of the Partnership's total rental and earned income (including
the Partnership's share of total rental and earned income from joint ventures)
for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Long John Silver's, Inc. ..................... $634,121 $850,159 $853,992
Checkers Drive-In Restaurants, Inc. .......... 628,816 724,612 732,941
Foodmaker, Inc. .............................. 574,481 562,725 556,100
Golden Corral Corporation..................... 534,624 520,911 476,350
Flagstar Enterprises, Inc. ................... 427,801 483,606 498,655
Denny's, Inc. ................................ N/A 379,767 380,939
</TABLE>
F-20
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from joint ventures) for each of the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Long John Silver's............................ $634,121 $850,159 $853,992
Checkers Drive-in Restaurants................. 628,816 724,612 732,941
Denny's....................................... 625,101 618,154 615,021
Jack in the Box............................... 574,481 562,725 556,100
Golden Corral Family Steakhouse Restaurants... 534,624 520,911 476,350
Hardee's...................................... 427,801 483,606 498,655
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant or group of affiliated tenants and the chains did not represent more
than ten percent of the Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any lessee or restaurant chain contributing more than ten
percent of the Partnership's revenues could significantly impact the results of
operations of the Partnership if the Partnership is not able to re-lease the
properties in a timely manner.
In June 1998, Long John Silver's, Inc. filed for bankruptcy and rejected the
leases relating to four of its nine leases and ceased making rental payments to
the Partnership on the rejected leases. The Partnership will not recognize any
rental and earned income from these Properties until new tenants for these
Properties are located, or until the Properties are sold and the proceeds from
such sales are reinvested in additional Properties. While Long John Silver's,
Inc. has not rejected or affirmed the remaining five leases, there can be no
assurance that some or all of these leases will not be rejected in the future.
The lost revenues resulting from the four leases that were rejected, as
described above, and the possible rejection of the remaining five leases could
have an adverse effect on the results of operations of the Partnership if the
Partnership is not able to re-lease these properties in a timely manner. The
Partnership entered into new leases, each with a new tenant, for two of the
four rejected leases.
11. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 4,313,041 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $42,435,559 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is
F-21
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
expected to be held in the third quarter of 1999, limited partners holding in
excess of 50% of the Partnership's outstanding limited partnership interests
must approve the Merger prior to consummation of the transaction. The general
partners intend to recommend that the limited partners of the Partnership
approve the Merger. In connection with their recommendation, the general
partners will solicit the consent of the limited partners at the special
meeting. If the limited partners reject the Merger, the Partnership will bear
the portion of the transaction costs based upon the percentage of "For" votes
and the general partners will bear the portion of such transaction costs based
upon the percentage of "Against" votes and abstentions.
12. Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 11 being adjusted to 2,156,521 shares valued at $20.00 per
APF share.
F-22
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of the Advisor
and the CNL Restaurant Financial Services Group, and the acquisition of the
Income Fund (the acquisition of the Income Fund is referred to as the
"Acquisition"), and is based on estimates and assumptions set forth below in
the notes to such information which included pro forma adjustments. This
unaudited pro forma financial information has been prepared utilizing the
historical financial statements of APF, the historical combined financial
information of the Income Fund, the Advisor and CNL Restaurant Financial
Services Group (shown separately as CFS and CFC) and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, Income Fund, Advisor and CNL Restaurant Financial Services Group. The
pro forma balance sheet assumes that the Acquisition occurred on 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.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of March 31, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL
Historical Pro Forma Historical Financial
APF Adjustments Subtotal Advisor Services, Inc.
------------ ----------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating
leases (net
depreciation).......... 475,787,661 58,749,637 (A) 534,537,298 0 0
Net Investment in Direct
Financing
Leases................. 123,270,117 0 123,270,117 0 0
Mortgages and Notes
Receivable............. 41,269,740 0 41,269,740 0 0
Other Investments....... 16,199,792 0 16,199,792 0 0
Investment In Joint
Ventures............... 1,083,564 0 1,083,564 0 0
Cash and Cash
Equivalents............ 35,796,119 (25,093,119)(A) 10,703,000 591,712 552,415
Restricted
Cash/Certificates of
Deposit................ 2,007,278 0 2,007,278 0 0
Receivables (net
allowances)
/Due from Related
Party.................. 548,862 0 548,862 7,141,967 5,457,493
Accrued Rental Income... 5,007,334 0 5,007,334 0 0
Other Assets............ 7,723,678 0 7,723,678 490,141 298,498
Goodwill................ 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Assets........... $708,694,145 $33,656,518 $742,350,663 $8,223,820 $6,308,406
============ =========== ============ ========== ==========
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued
Liabilities............ $ 3,464,190 $ 0 $ 3,464,190 $ 576,531 $ 304,375
Accrued Construction
Costs
Payable................ 10,172,169 0 10,172,169 0 0
Distributions Payable... 0 0 0 119,808 0
Due to Related Parties.. 148,629 0 148,629 0 563,724
Income Tax Payable...... 0 0 0 0 0
Line of Credit/Notes
payable................ 34,150,000 33,656,518 (A) 67,806,518 386,229 0
Deferred Income......... 2,052,530 0 2,052,530 0 0
Rents Paid in Advance... 1,340,636 0 1,340,636 0 0
Minority Interest....... 280,970 0 280,970 0 0
Common Stock............ 373,483 0 373,483 0 0
Common Stock--Class A... 0 0 0 6,400 2,000
Common Stock--Class B... 0 0 0 3,600 724
Additional Paid-in-
capital................ 670,005,177 0 670,005,177 4,617,047 5,303,503
Accumulated
distributions in excess
of net earnings........ (13,293,639) 0 (13,293,639) 2,514,205 134,080
Partners Capital........ 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Liabilities and
Equity................ $708,694,145 $33,656,518 $742,350,663 $8,223,820 $6,308,406
============ =========== ============ ========== ==========
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of March 31, 1999
<TABLE>
<CAPTION>
Historical Historical
CNL Combining CNL Income
Financial Pro Forma Combined Funds Pro Forma Adjusted
Corp. Adjustments APF XIV, Ltd. Adjustments Pro Forma
------------ ------------ -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... 0 0 534,537,298 26,345,787 6,067,515 (B2) 566,950,600
Net Investment in Direct
Financing Leases....... 0 0 123,270,117 7,276,175 1,548,113 (B2) 132,094,405
Mortgages and Notes
Receivable............. 247,896,287 0 289,166,027 -- 0 289,166,027
Other Investments....... 6,353,482 0 22,553,274 0 0 22,553,274
Investment In Joint
Ventures............... 0 0 1,083,564 3,863,338 1,072,914 (B2) 6,019,816
Cash and Cash
Equivalents............ 4,896,688 (7,924,311)(B1) 8,819,504 763,678 (2,778,689)(B2) 6,329,493
(475,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 853,243 0 2,860,521 -- 0 2,860,521
Receivables (net
allowances)
/Due from Related
Party.................. 1,969,339 (148,629)(C) 14,969,032 36,238 (24,708)(E) 14,980,562
Accrued Rental Income... 0 0 5,007,334 1,987,635 (1,987,635)(B2) 5,007,334
Other Assets............ 2,731,394 (2,792,876)(B1) 8,450,835 50,702 (50,702)(B2) 8,450,835
Goodwill................ 0 42,813,987 (B1) 42,813,987 0 0 42,813,987
------------ ------------ -------------- ----------- ----------- --------------
Total Assets........... $264,700,433 $ 31,948,171 $1,053,531,493 $40,323,553 $ 3,371,808 $1,097,226,854
============ ============ ============== =========== =========== ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 1,613,959 $ 0 $ 5,959,055 $ 45,167 $ 0 $ 6,004,222
Accrued Construction
Costs Payable.......... 0 0 10,172,169 0 0 10,172,169
Distributions Payable... 0 0 119,808 928,130 0 1,047,938
Due to Related Parties.. 31,310,681 (148,629)(C) 31,874,405 24,708 (24,708)(E) 31,874,405
Income Tax Payable...... 271,741 (271,741)(D) 0 0 0 0
Line of Credit/Notes
payable................ 226,937,481 0 295,130,228 0 0 295,130,228
Deferred Income......... 0 0 2,052,530 0 0 2,052,530
Rents Paid in Advance... 0 0 1,340,636 66,659 0 1,407,295
Minority Interest....... 0 0 280,970 0 280,970
Common Stock............ 0 61,500 (B1) 434,983 0 21,328 (B2) 456,311
Common Stock--Class A... 200 (8,600)(B1) 0 0 0 0
Common Stock--Class B... 501 (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 3,937,095 122,938,500 (B1) 792,943,677 0 42,634,077 (B2) 835,577,754
(13,857,645)(B1)
Accumulated
distributions in excess
of net earnings........ 628,775 (3,277,060)(B1) (86,776,968) 0 0 (86,776,968)
(73,755,070)(B1)
271,741 (D)
Partners Capital........ 0 0 0 39,258,889 (39,258,889)(B2) 0
------------ ------------ -------------- ----------- ----------- --------------
Total Liabilities and
Equity................ $264,700,433 $ 31,948,171 $1,053,531,493 $40,323,553 $ 3,371,808 $1,097,226,854
============ ============ ============== =========== =========== ==============
</TABLE>
F-25
<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
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $12,184,008 $2,339,153(a) $14,523,161 $ 0 $ 0 $ 0
Fees................... 0 0 0 2,307,364 1,391,466 8,137
Interest and Other
Income................ 2,214,763 0 2,214,763 47,213 129,362 5,233,919
----------- ---------- ----------- ---------- ---------- ----------
Total Revenue.......... $14,398,771 $2,339,153 $16,737,924 $2,354,577 $1,520,828 $5,242,056
Expenses:
General and
Administrative
Expenses.............. 1,095,269 0 1,095,269 2,563,714 1,323,577 64,186
Management and Advisory
Fees.................. 697,364 0 697,364 0 0 611,196
Fees Paid to Related
Parties............... 0 0 0 23,326 292,575 0
Interest Expense....... 0 0 0 50,730 0 4,769,268
State Taxes............ 235,208 0 235,208 0 0 0
Depreciation--Other.... 0 0 0 39,581 26,238 0
Depreciation--
Property.............. 1,548,813 349,465(a) 1,898,278 0 0 0
Amortization........... 7,368 0 7,368 0 0 0
Transaction Costs...... 125,926 0 125,926 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
Total Expenses......... 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, 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)
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 17,271 0 17,271 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Provision For Loss on
Properties............ (215,797) 0 (215,797) 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
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)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 127,496 48,017 73,166
----------- ---------- ----------- ---------- ---------- ----------
Net Earnings (Losses)... $10,490,297 $1,989,688 $12,479,985 $ (195,278) $ (73,545) $ (129,428)
=========== ========== =========== ========== ========== ==========
Earnings Per
Share/Unit............. $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ==========
Book Value Per
Share/Unit............. $ 17.59 $ 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
=========== ========== =========== ========== ========== ==========
Ratio of Earnings to
Fixed Charges.......... 50.03x n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========== ==========
Wtd. Avg. Units
Outstanding............ 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
=========== ========== =========== ========== ========== ==========
Shares Outstanding...... 37,348,464 n/a 37,348,464 n/a n/a n/a
=========== ========== =========== ========== ========== ==========
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 Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Combining Historical CNL
Pro Forma Combined Income Fund Pro Forma Adjusted
Adjustments APF XIV, Ltd. Adjustments Pro Forma
----------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $14,523,161 $ 905,971 $ 15,926 (j) $ 15,445,058
Fees................... (2,450,663)(b),(c) 1,256,304 0 (27,872)(k) 1,228,432
Interest and Other
Income................ 62,068 (d) 7,687,325 10,520 0 7,697,845
----------- ----------- --------- --------- ------------
Total Revenue.......... $(2,388,595) $23,466,790 $ 916,491 $ (11,946) $ 24,371,335
Expenses:
General and
Administrative
Expenses.............. (377,734)(e) 4,669,012 61,001 (32,125)(l),(m) 4,697,888
Management and Advisory
Fees.................. (1,308,560)(f) 0 9,544 (9,544)(n) 0
Fees Paid to Related
Parties............... (292,786)(g) 23,115 0 0 23,115
Interest Expense....... 0 4,819,998 0 0 4,819,998
State Taxes............ 0 235,208 30,354 8,796 (o) 274,358
Depreciation--Other.... 0 65,819 0 0 65,819
Depreciation--
Property.............. 0 1,898,278 102,595 25,305 (p) 2,026,178
Amortization........... 535,175 (h) 542,543 1,331 0 543,874
Transaction Costs...... 0 125,926 33,175 0 159,101
----------- ----------- --------- --------- ------------
Total Expenses......... (1,443,905) 12,379,899 238,000 (7,568) 12,610,331
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties, and
Provision for Losses on
Properties............. $ (944,690) $11,086,891 $ 678,491 $ (4,378) $ 11,761,004
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 0 17,271 93,686 (5,669)(q) 105,288
Gain on Sale of
Properties............ 0 0 0 0 0
Provision For Loss on
Properties............ 0 (215,797) (60,882) 0 (276,679)
----------- ----------- --------- --------- ------------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (944,690) 10,888,365 711,295 (10,047) 11,589,613
Benefit/(Provision) for
Federal Income Taxes.. (248,679)(i) 0 0 0 0
----------- ----------- --------- --------- ------------
Net Earnings (Losses)... $(1,193,369) $10,888,365 $ 711,295 $ (10,047) $ 11,589,613
=========== =========== ========= ========= ============
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.16 $ n/a $ 0.25
=========== =========== ========= ========= ============
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.72 $ n/a $ 16.42
=========== =========== ========= ========= ============
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.21 $ n/a $ n/a
=========== =========== ========= ========= ============
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.27
=========== =========== ========= ========= ============
Wtd. Avg. Units
Outstanding............ n/a n/a 4,500,000 n/a n/a
=========== =========== ========= ========= ============
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,401 n/a 2,132,770 45,630,171 (r)
=========== =========== ========= ========= ============
Shares Outstanding...... 6,150,000 43,498,464 n/a 2,132,770 45,631,234
=========== =========== ========= ========= ============
Calculation of Pro Forma
Distributions:
Pro Forma Cash from
Operations from
Statement of Cash
Flows................. $(22,864,160)
Addback Pro Forma
Investments in Notes
Receivable............ 42,571,895
------------
Adjusted Pro Forma
Distributions Declared: $ 19,707,735 (s)
============
Pro Forma Wtd. Avg.
Dollars Outstanding.... $912,603,425 (t)
============
Pro Forma Cash
Distributions Declared
per $10,000
Investment............. $ 216 (u)
============
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 $21,919,865(a) $55,049,526 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $21,919,865 $64,106,902 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 2,889,368(a) 6,931,658 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 2,889,368 12,298,325 11,435,228 7,966,916 25,677,829
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties and
Provision for Losses on
Properties............. $32,778,080 $19,030,497 $51,808,577 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Other Expenses......... 0 0 0 0 0 0
Provision For Loss on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
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
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $19,030,497 $51,182,905 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Units
Outstanding............ n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,570,983 34,219,202 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 34,757 37,372,684 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Calculation of Pro Forma
Distributions Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows.............
Addback Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable......
Addback Pro Forma
Investments in Notes
Receivable............
Adjusted Pro Forma
Distributions Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL Income
Pro Forma Combined Fund Pro Forma
Adjustments APF XIV, Ltd. Adjustments
------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental and Earned Income..................... $ 0 $55,049,526 $3,423,731 $ 63,704 (j)
Fees......................................... (32,715,768)(b),(c) 3,226,263 0 (78,060)(k)
Interest and Other Income.................... 207,144 (d) 32,221,925 90,425 0
------------ ----------- ---------- ---------
Total Revenue................................ $(32,508,624) $90,497,714 $3,514,156 $ (14,356)
Expenses:
General and Administrative................... (4,241,719)(e) 15,939,556 219,928 (94,999)(l),(m)
Management and Advisory Fees................. (4,658,434)(f) 0 37,430 (37,430) (n)
Fees to Related Parties...................... (2,161,897)(g) 858,787 0 0
Interest Expense............................. 0 21,498,589 0 0
State Taxes.................................. 0 567,446 22,498 13,260 (o)
Depreciation--Other.......................... 0 199,157 0 0
Depreciation--Property....................... (340,898)(r) 6,590,760 378,382 101,222 (p)
Amortization................................. 2,140,699 (h) 2,304,700 2,432 0
Transaction Costs............................ 0 157,054 25,231 0
------------ ----------- ---------- ---------
Total Expenses............................... (9,262,249) 48,116,049 685,901 (17,947)
Operating Earnings(Losses) Before Equity in
Earnings of Joint Ventures/Minority
Interests, Gain on Sale of Properties and
Provision for Losses on Properties........... $(23,246,375) $42,381,665 $2,828,255 $ 3,591
Equity in Earnings of Joint Venture/Minority
Interest.................................... 0 (14,138) 317,654 (22,677)(q)
Gain on Sale of Properties................... 0 0 90,333 0
Gain on Securitization....................... 0 3,694,351 0 0
Other Expenses............................... 0 0 0 0
Provision For Loss on Properties............. 0 (611,534) (37,155) 0
------------ ----------- ---------- ---------
Net Earnings (Losses) Before Benefit/
(Provision) for Federal Income Taxes......... (23,246,375) 45,450,344 3,199,087 (19,086)
Benefit/(Provision) for Federal Income
Taxes....................................... 6,898,434 (i) 0 0 0
------------ ----------- ---------- ---------
Net Earnings (Losses)......................... $(16,347,941) $45,450,344 $3,199,087 $ (19,086)
============ =========== ========== =========
Earnings Per Share/Unit....................... $ n/a $ n/a $ 0.71 $ n/a
============ =========== ========== =========
Book Value Per Share/Unit..................... $ n/a $ n/a $ 8.77 $ n/a
============ =========== ========== =========
Dividends Per Share/Unit...................... $ n/a $ n/a $ 0.83 $ n/a
============ =========== ========== =========
Ratio of Earnings to Fixed Charges............ n/a n/a n/a n/a
============ =========== ========== =========
Wtd. Avg. Units Outstanding................... n/a n/a 4,500,000 n/a
============ =========== ========== =========
Wtd. Avg. Shares Outstanding.................. 6,150,000 40,369,202 n/a 2,132,770
============ =========== ========== =========
Shares Outstanding............................ 6,150,000 43,522,684 n/a 2,132,770
============ =========== ========== =========
Calculation of Pro Forma Distributions Declared:
Pro Forma Cash from Operations from Statement
of Cashflows................................
Addback Pro Forma Net Cash Proceeds from
Securitization of Notes Receivable..........
Addback Pro Forma Investments in Notes
Receivable..................................
Adjusted Pro Forma Distributions Declared:
Pro Forma Wtd. Avg. Dollars Outstanding.......
Pro Forma Cash Distributions Declared per
$10,000 Investment...........................
<CAPTION>
Adjusted
Pro Forma
-----------------
<S> <C>
Revenues:
Rental and Earned Income..................... $ 58,536,961
Fees......................................... 3,148,203
Interest and Other Income.................... 32,312,350
-----------------
Total Revenue................................ $ 93,997,514
Expenses:
General and Administrative................... 16,064,485
Management and Advisory Fees................. 0
Fees to Related Parties...................... 858,787
Interest Expense............................. 21,498,589
State Taxes.................................. 603,204
Depreciation--Other.......................... 199,157
Depreciation--Property....................... 7,070,364
Amortization................................. 2,307,132
Transaction Costs............................ 182,285
-----------------
Total Expenses............................... 48,784,003
Operating Earnings(Losses) Before Equity in
Earnings of Joint Ventures/Minority
Interests, Gain on Sale of Properties and
Provision for Losses on Properties........... $ 45,213,511
Equity in Earnings of Joint Venture/Minority
Interest.................................... 280,839
Gain on Sale of Properties................... 90,333
Gain on Securitization....................... 3,694,351
Other Expenses............................... 0
Provision For Loss on Properties............. (648,689)
-----------------
Net Earnings (Losses) Before Benefit/
(Provision) for Federal Income Taxes......... 48,630,345
Benefit/(Provision) for Federal Income
Taxes....................................... 0
-----------------
Net Earnings (Losses)......................... $ 48,630,345
=================
Earnings Per Share/Unit....................... $ 1.14
=================
Book Value Per Share/Unit..................... $ 16.46
=================
Dividends Per Share/Unit...................... $ n/a
=================
Ratio of Earnings to Fixed Charges............ 3.20x
=================
Wtd. Avg. Units Outstanding................... n/a
=================
Wtd. Avg. Shares Outstanding.................. 42,501,972 (s)
=================
Shares Outstanding............................ 45,655,454
=================
Calculation of Pro Forma Distributions Declared:
Pro Forma Cash from Operations from Statement
of Cashflows................................ $ 59,041,728
Addback Pro Forma Net Cash Proceeds from
Securitization of Notes Receivable.......... (265,871,668)
Addback Pro Forma Investments in Notes
Receivable.................................. 288,590,674
-----------------
Adjusted Pro Forma Distributions Declared: $ 81,760,734 (t)
=================
Pro Forma Wtd. Avg. Dollars Outstanding....... $ 850,039,437 (u)
=================
Pro Forma Cash Distributions Declared per
$10,000 Investment........................... $ 962 (v)
=================
</TABLE>
F-29
<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 Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 10,490,297 $ 1,989,688 (a) $ 12,479,985 $ (195,278) $ (73,545) $ (129,428)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 1,548,813 349,465 (b) 1,898,278 39,581 0 0
Amortization expense... 7,368 0 7,368 0 26,238 424,697
Minority interest in
income of consolidated
joint venture......... 7,763 0 7,763 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 23,234 0 23,234 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 215,797 0 215,797 0 0 (73,166)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (82,660) 0 (82,660) (377,933) (242,251) (6,771)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (449,580)
Investment in notes
receivable............ 0 0 0 0 0 (42,571,895)
Collections on notes
receivable............ 0 0 0 0 0 6,417,907
Increase in restricted
cash.................. 0 0 0 0 0 (402,461)
Decrease in due from
related party......... 0 0 0 0 0 55,382
Decrease (increase) in
prepaid expenses...... 27,548 0 27,548 0 1,811 0
Decrease in net
investment in direct
financing leases...... 787,375 0 787,375 0 0 0
Increase in accrued
rental income......... (1,047,421) 0 (1,047,421) 0 0 0
Decrease (increase) in
intangibles and other
assets................ (30,554) 7,942
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 306,277 0 306,277 (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 0 71,853 25,550 0 0
Decrease in accrued
interest.............. 0 0 0 0 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 386,365 0 386,365 0 0 0
Increase (decrease) in
deferred rental
income................ 862,647 0 862,647 0 0 0
------------- ------------ ------------- ----------- --------- -----------
Total adjustments...... 3,114,959 349,465 3,464,424 (1,183,414) (344,708) (37,064,802)
------------- ------------ ------------- ----------- --------- -----------
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)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 0 0 0 0
Additions to land and
buildings on operating
leases................ (77,028,830 (58,749,637)(e) (135,778,467) (31,577) (10,092) 0
Investment in direct
financing leases...... (29,608,346) 0 (29,608,346) 0 0 0
Investment in joint
venture............... (117,662) 0 (117,662) 0 0 0
Aqcuisition of
businesses............
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 134,981
Investment in mortgage
notes receivable...... (1,388,463) 0 (1,388,463) 0 0 0
Collections on mortgage
note receivable....... 75,010 0 75,010 0 0 0
Investment in notes
receivable............ (1,087,483) 0 (1,087,483) 0 0 0
Collection on notes
receivable............ 239,596 0 239,596 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... 0 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------ ------------- ----------- --------- -----------
Net cash provided by
(used in) investing
activities............ (108,916,178) (58,749,637) (167,665,815) (31,577) (10,092) 134,981
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,735 0 210,735 1,288,673 20,572 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,142,237) 0 (1,142,237) 0 0 0
Payment of stock
issuance costs........ (722,001) 0 (722,001) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 36,587,245 33,656,518 (e) 70,243,763 0 0 49,730,934
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (2,385) (10,291,473)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (8,610) 0 (8,610) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0 0
Distributions to
stockholders.......... (14,237,405) 0 (14,237,405) 0 0 0
Other.................. (200,234) 0 (200,234) 0 0 (9,602)
------------- ------------ ------------- ----------- --------- -----------
Net cash provided by
(used in) financing
activities............ 7,907,204 22,953,518 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
Cash at beginning of
year................... 123,199,837 0 123,199,837 713,308 962,573 2,526,078
------------- ------------ ------------- ----------- --------- -----------
Cash at end of year..... $ 35,796,119 $(22,753,966) $ 13,042,153 $ 591,712 $ 552,415 $ 4,896,688
============= ============ ============= =========== ========= ===========
</TABLE>
F-30
<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>
Historical
Combining CNL
Pro Forma Income Fund Pro Forma Adjusted
Adjustments Combined APF XIV, Ltd. Adjustments Pro Forma
----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(1,193,369)(a) $ 10,888,365 $711,295 $ (10,047)(a) $ 11,589,613
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 0 1,937,859 102,595 25,305 (b) 2,065,759
Amortization expense... 535,175 (c) 993,478 1,331 0 994,809
Minority interest in
income of consolidated
joint venture......... 0 7,763 0 0 7,763
Equity in earnings of
joint ventures, net of
distributions......... 0 23,234 (6,301) 5,669 (d) 22,602
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 0 142,631 60,882 0 203,513
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (709,615) 26,586 0 (683,029)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (449,580) 0 0 (449,580)
Investment in notes
receivable............ 0 (42,571,895) 0 0 (42,571,895)
Collections on notes
receivable............ 0 6,417,907 0 0 6,417,907
Increase in restricted
cash.................. 0 (402,461) 0 0 (402,461)
Decrease in due from
related party......... 0 55,382 0 0 55,382
Decrease (increase) in
prepaid expenses...... 0 29,359 (10,386) 0 18,973
Decrease in net
investment in direct
financing leases...... 0 787,375 23,927 0 811,302
Increase in accrued
rental income......... 0 (1,047,421) (92,286) 0 (1,139,707)
Decrease (increase) in
intangibles and other
assets................ 0 (22,612) 0 0 (22,612)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (768,267) 24,392 0 (743,875)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 97,403 (724) 0 96,679
Decrease in accrued
interest.............. 0 (362,877) 0 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 0 386,365 (21,439) 0 364,926
Increase (decrease) in
deferred rental
income................ 0 862,647 0 0 862,647
----------- ------------- -------- ----------- -------------
Total adjustments...... 535,175 (34,593,325) 108,577 30,974 (34,453,774)
----------- ------------- -------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (658,194) (23,704,960) 819,872 20,927 (22,864,161)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 0 0 0
Additions to land and
buildings on operating
leases................ (135,820,136) 0 (135,820,136)
Investment in direct
financing leases...... 0 (29,608,346) 0 0 (29,608,346)
Investment in joint
venture............... 0 (117,662) (44,120) 0 (161,782)
Aqcuisition of
businesses............ (7,924,311)(f) (7,924,311) (2,778,689)(g) (11,178,000)
(475,000)(g)
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 134,981 0 0 134,981
Investment in mortgage
notes receivable...... 0 (1,388,463) 0 0 (1,388,463)
Collections on mortgage
note receivable....... 0 75,010 0 0 75,010
Investment in notes
receivable............ 0 (1,087,483) 0 0 (1,087,483)
Collection on notes
receivable............ 0 239,596 0 0 239,596
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 (33,000) 0 (33,000)
----------- ------------- -------- ----------- -------------
Net cash provided by
(used in) investing
activities............ (7,924,311) (175,496,814) (77,120) (3,253,689) (178,827,623)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 1,519,980 0 0 1,519,980
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,142,237) 0 0 (1,142,237)
Payment of stock
issuance costs........ 0 (722,001) 0 0 (722,001)
Proceeds from borrowing
on line of
credit/notes payable.. 0 119,974,697 0 0 119,974,697
Payment on line of
credit/notes payable.. 0 (22,874,147) 0 0 (22,874,147)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (8,610) 0 0 (8,610)
Distributions to
limited partners...... 0 0 (928,130) 0 (928,130)
Distributions to
stockholders.......... 0 (14,237,405) 0 0 (14,237,405)
Other.................. 0 (209,836) 0 0 (209,836)
----------- ------------- -------- ----------- -------------
Net cash provided by
(used in) financing
activities............ 0 82,300,441 (928,130) 0 81,372,311
Net increase in cash.... (8,582,505) (116,901,333) (185,378) (3,232,762) (120,319,473)
Cash at beginning of
year................... 0 127,401,796 949,056 0 128,350,852
----------- ------------- -------- ----------- -------------
Cash at end of year..... $(8,582,505) $ (10,500,463) $763,678 $(3,232,762) $ (8,031,379)
=========== ============= ======== =========== =============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Restated Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income(loss)........ $ 32,152,408 $ 19,030,497 (a) $ 51,182,905 $10,656,379 $(468,133) $ 427,134
Adjustments to reconcile
net income(loss) to net
cash provided by (used
in) operating
activities:
Depreciation........... 4,042,290 2,889,368 (b) 6,931,658 119,923 79,234 0
Amortization expense... 11,808 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
leases................ 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) (2,187,652) 0 0 0
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 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 693,372 0 0 0
------------- ------------ ------------- ----------- ---------- -------------
Total adjustments...... 6,963,867 2,889,368 9,853,235 (3,608,563) 316,963 1,610,591
------------- ------------ ------------- ----------- ---------- -------------
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
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (58,749,637)(e) (258,851,304) (381,671) (236,372) 0
Investment in direct
financing leases...... (47,115,435) (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) (974,696) 0 0 0
Acquisition of
businesses
Purchase of other
investments........... (16,083,055) (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) (6,281,069) 0 0 0
0 0 0 0 0
Other.................. 0 0 200,000 0 0
------------- ------------ ------------- ----------- ---------- -------------
Net cash provided
by(used in) investing
activities............ (277,338,756) (58,749,637) (336,088,393) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0
0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 33,656,518 (e) 41,348,558 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) (34,073) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0
Distributions to
stockholders.......... (39,449,149) (39,449,149) (9,364,488) 0 0
Other.................. (95,101) (95,101) 0 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 (3,173,214) 72,439,806 449,308 (335,688) 1,845,986
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 $ (3,173,214) $ 120,026,583 $ 713,308 962,573 2,526,078
============= ============ ============= =========== ========== =============
</TABLE>
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL Income Merger
Pro Forma Combined Funds Pro Forma Adjusted
Adjustments APF XIV, Ltd. Adjustments Pro Forma
------------ ------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income(loss)........ $(16,347,941)(a) $ 45,450,344 $3,199,087 $ (19,086)(a) $ 48,630,345
Adjustments to reconcile
net income(loss) to net
cash provided by(used
in) operating
activities:
Depreciation........... (340,898)(b) 6,789,917 378,381 101,222 (b) 7,269,520
Amortization expense... 2,140,699 (c) 4,454,783 2,433 4,457,216
Minority interest in
income of consolidated
joint venture......... 30,156 0 30,156
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 26,030 22,677 (d) 33,267
Loss(gain) on sale of
land, building, net
investment in direct
leases................ 0 (90,333) (90,333)
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 1,009,576 37,155 1,046,731
Gain on
securitization........ (3,356,538) 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 265,871,668 0 265,871,668
Decrease(increase) in
other receivables..... (2,543,413) (38,232) (2,581,645)
Increase in accrued
interest income
included in notes
receivable............ (170,492) 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0
Investment in notes
receivable............ (288,590,674) 0 (288,590,674)
Collections on notes
receivable............ 23,539,641 0 23,539,641
Decrease in restricted
cash.................. 2,504,091 0 2,504,091
Decrease(increase) in
due from related
party................. (953,688) 0 (953,688)
Increase in prepaid
expenses.............. 7,246 (474) 6,772
Decrease in net
investment in direct
financing leases...... 1,971,634 82,359 2,053,993
Increase in accrued
rental income......... (2,187,652) (148,845) (2,336,497)
Increase in intangibles
and other assets...... (154,351) 0 (154,351)
Increase(decrease) in
accounts payable,
accrued expenses and
other
liabilities........... 846,680 (9,038) 837,642
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. (133,364) 17,579 (115,785)
Increase in accrued
interest.............. (77,968) 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 58,442 495,285
Decrease in deferred
rental income......... 693,372 0 693,372
------------ ------------- ---------- ----------- -------------
Total adjustments...... 1,799,801 9,972,027 315,457 123,899 10,411,383
------------ ------------- ---------- ----------- -------------
Net cash provided
by(used in) operating
activities............ (14,548,140) 55,422,371 3,514,544 104,813 59,041,728
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 1,606,702 3,992,643
Additions to land and
buildings on operating
leases................ (259,469,347) (605,712) (260,075,059)
Investment in direct
financing leases...... (47,115,435) (931,237) (48,046,672)
Investment in joint
venture............... (974,696) (568,498) (1,543,194)
Acquisition of
businesses (7,924,311)(f) (7,924,311) (2,778,689)(g) (11,178,000)
(475,000)(g)
Purchase of other
investments........... (16,083,055) 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 295,514 0 295,514
Proceeds from retained
interest and
securities, excluding
investment
income................ 212,821 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648)
Collections on mortgage
note receivable....... 291,990 0 291,990
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750)
Collections on
equipment notes
receivable............ 3,046,873 0 3,046,873
Decrease in restricted
cash.................. 0 318,592 318,592
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069)
0 0 0
Other.................. 200,000 41,408 241,408
------------ ------------- ---------- ----------- -------------
Net cash provided
by(used in) investing
activities............ (7,924,311) (342,139,172) (138,745) (3,253,689) (345,531,606)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 386,592,011 0 386,592,011
Contributions from
limited partners...... 0 0 0
0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925)
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 455,102,478 0 455,102,478
Payment on line of
credit/notes payable.. (411,813,826) 0 (411,813,826)
Retirement of shares of
common stock.......... (639,528) 0 (639,528)
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073)
Distributions to
limited partners...... 0 (3,712,520) (3,712,520)
Distributions to
stockholders.......... (48,813,637) 0 (48,813,637)
Other.................. (2,595,088) 0 (2,595,088)
------------ ------------- ---------- ----------- -------------
Net cash provided
by(used in) financing
activities............ 0 338,643,762 (3,712,520) 0 334,931,242
Net increase(decrease)
in cash................ (22,472,451) 51,926,961 (336,721) (3,148,876) 48,441,364
Cash at beginning of
year................... 49,829,130 1,285,777 51,114,907
------------ ------------- ---------- ----------- -------------
Cash at end of year..... (22,472,451) 101,756,091 $ 949,056 $(3,148,876) $ 99,556,271
============ ============= ========== =========== =============
</TABLE>
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of 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 Income Fund. This unaudited pro forma financial
information has been prepared utilizing the historical financial statements of
APF and the historical combined financial information of the Advisor, CNL
Restaurant Financial Services Group and the Income Fund and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, the Advisor the CNL Restaurant Financial Services Group and the Income
Fund. The Pro Forma Balance Sheet was prepared as if the transactions described
above occurred on 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 Fund 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 Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
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
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
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.
(B) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Shares Offered.......... 3,800,000 2,350,000 2,132,770.25 8,282,770.25
Exchange Value.......... $ 20 $ 20 $ 20 $ 20
----------- ----------- ------------- ------------
Share Consideration..... $76,000,000 $47,000,000 $ 42,655,405 $165,655,405
Cash Consideration...... -- -- 475,000 475,000
APF Transaction Costs... 4,896,322 3,027,989 2,778,689 10,703,000
----------- ----------- ------------- ------------
Total Purchase
Price.............. $80,896,322 $50,027,989 $ 45,909,094 $176,833,405
=========== =========== ============= ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 7,141,252 $10,006,878 $ 39,258,889 $ 56,407,019
Purchase Price Adjust-
ments:
Land and buildings on
operating leases..... 6,067,515 6,067,515
Net investment in
direct financing
leases............... 1,548,113 1,548,113
Investment in joint
ventures............. 1,072,914 1,072,914
Accrued rental in-
come................. (1,987,635) (1,987,635)
Intangibles and other
assets............... (2,792,876) (50,702) (2,843,578)
Goodwill*............. 42,813,987 -- 42,813,987
Excess purchase
price................ 73,755,070 -- -- 73,755,070
----------- ----------- ------------- ------------
Total Allocation.... $80,896,322 $50,027,989 $ 45,909,094 $176,833,405
=========== =========== ============= ============
</TABLE>
- --------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $10,703,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess purchase
price paid for the Advisor to a related party of $73,755,070 was expensed at
March 31, 1999 because the Advisor has not been deemed to qualify as a
"business" for purposes of applying APB Opinion No. 16, "Business
Combinations". Goodwill of 42,813,987 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 Earn-
ings.......... 3,277,060
Accumulated
distributions
in excess of
earnings...... 73,755,070
Goodwill for
CFC (Intangi-
bles and other
assets)....... 42,813,987
CFC/CFS Org
Costs/Other
Assets...... 2,792,876
Cash to pay
APF transac-
tion costs.. 7,924,311
APF Common
Stock....... 61,500
APF APIC..... 122,938,500
(To record ac-
quisition of
CFA, CFS and
CFC)
2.Partners Capi-
tal............. 39,258,889
Land and build-
ings on oper-
ating leases.. 6,067,515
Net investment
in direct fi-
nancing
leases........ 1,548,113
Investment in
joint ven-
tures......... 1,072,914
Accrued
rental in-
come........ 1,987,635
Intangibles
and other
assets...... 50,702
Cash to pay
APF Transac-
tion costs.. 2,778,689
Cash consid-
eration to
Income In-
come Fund... 475,000
APF Common
Stock....... 21,328
APF APIC..... 42,634,077
(To record ac-
quisition of
Income Fund)
</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 Income Fund of $24,708 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, 1999.
(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
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
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
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<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 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
</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>
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $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)
<TABLE>
<S> <C>
Amortization of goodwill..................................... $535,175
</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 $15,926 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the
leases had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................. $ (9,544)
Reimbursement of administrative costs....................... (18,328)
--------
$(27,872)
========
</TABLE>
(l) Represents the elimination of $18,328 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $13,797 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 $9,544 in management fees by the
Income Fund to the Advisor.
(o) Represents additional state income taxes of $8,796 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through May 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 Fund 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 $25,305 as a
result of adjusting the historical basis of the real estate wholly
owned by the Income Fund to fair value as a result of accounting
for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings is
being depreciated using the straight-line method over the
remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $5,669 as a result of adjusting the historical basis of the real
estate owned by the Income Fund, indirectly through joint venture
or tenancy in common arrangements, to fair value as a result of
accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 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.
(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.
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................ $ (1,773,406)
Secured equipment lease fees............................ (54,998)
Advisory fees........................................... (305,030)
Reimbursement of administrative costs................... (408,762)
Acquisition fees........................................ (21,794,386)
Underwriting fees....................................... (388,491)
Administrative, executive and guarantee fees............ (1,233,043)
Servicing fees.......................................... (1,570,331)
Development fees........................................ (229,153)
Management fees......................................... (1,851,004)
------------
Total................................................. $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the year ended
December 31, 1998, which were deferred for pro forma purposes as
described in 5(II)(c). These deferred loan origination fees are
being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income............................................... $207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs......................... $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees.......................................... $(1,851,004)
Administrative executive and guarantee fees.............. (1,233,043)
Servicing fees........................................... (1,269,357)
Advisory fees............................................ (305,030)
-----------
$(4,658,434)
===========
</TABLE>
F-40
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $2,161,897 in fees between the
Advisor and the CNL Restaurant Financial Services Group resulting
from agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4)
<TABLE>
<S> <C>
Amortization of goodwill................................... $2,140,699
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $63,704 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................. $(37,430)
Reimbursement of administrative costs....................... (40,630)
--------
$(78,060)
========
</TABLE>
(l) Represents the elimination of $40,630 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $54,369 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $37,430 in management fees by the
Income Fund to the Advisor.
(o) Represents additional state income taxes of $13,260 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1998 through 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 Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
(p) Represents an increase in depreciation expense of $101,222 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Income Fund through joint venture or tenancy in
common arrangements with affiliates or unrelated third parties, to
fair value as a result by the Income Fund to fair value as a result
of accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $22,677 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
F-41
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(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 from the pro forma statement of cash flows.
(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.
F-42
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the 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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non-Cash Investing Activities
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B)
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the use of amounts borrowed under APF's credit facility
and the use of cash to 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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
F-43
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund XIV, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund XIV, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
A-1
<PAGE>
(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
A-2
<PAGE>
Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
A-3
<PAGE>
Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among by and among CNL American Properties Fund,
Inc., a Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware
limited partnership (the "Operating Partnership"), CNL APF GP corp., a Delaware
corporation (the "OP General Partner"), CNL Income Fund XIV, Ltd., a Florida
limited partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr.,
and CNL Realty Corporation, a Florida corporation (together with Messrs. Borne
and Seneff, the "General Partners"). APF, the Operating Partnership, the OP
General Partner, the Fund and the General Partners are referred to collectively
herein as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund will
be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. AMENDMENTS TO MERGER AGREEMENT
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its
entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred
by the Fund but paid or assumed by APF on behalf of the Fund (or, if
APF consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote
against the Merger and affirmatively elect the note option, such
limited partners shall be entitled to receive, in lieu of the Share
Consideration, notes (the "Notes") in the aggregate amount equal to 97%
of the value (based on the Exchange Value as defined in the
Registration Statement) of the Share Consideration such Dissenting
Partners would have otherwise received had such partners not elected to
receive the Notes (the "Note Option"). The Notes will mature on the
fifth anniversary of the Closing Date and will bear interest at a fixed
rate equal to seven percent. The aggregate Share Consideration shall be
reduced on a one-for-basis for all APF Shares otherwise distributable
to Dissenting Partners had such Dissenting Partners not elected the
Note Option."
B-1
<PAGE>
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to Dissenting
Limited Partners shall not have exceeded 15% of the value of the Share
Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. GENERAL
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will
constitute one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of
Florida or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Florida.
B-2
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
_________________________________
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
_________________________________
By: Robert A. Bourne
Its: President
CNL APF GP CORP.
/s/ Robert A. Bourne
_________________________________
By: Robert A. Bourne
Its: President
CNL INCOME FUND IX, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
_________________________________
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
_________________________________
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
_________________________________
Robert A. Bourne, as General
Partner
/s/ James M. Seneff, Jr.
_________________________________
James M. Seneff, Jr., as General
Partner
B-3
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund XIV, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
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"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 4,313,041 fully paid and nonassessable APF Common
Shares (2,156,521 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $38,309,732, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 56,686,959 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 4,500,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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<PAGE>
will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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<PAGE>
(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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<PAGE>
from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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<PAGE>
Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $4,313,041 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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<PAGE>
transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
B-31
<PAGE>
12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
B-32
<PAGE>
ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $431,304 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
B-33
<PAGE>
14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
B-34
<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
B-35
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
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 XIV, 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
B-36
<PAGE>
Appendix C
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF LIMITED PARTNERSHIP
OF
CNL Income Fund XIV, Ltd.
- --------------------------------------------------------------------------------
(Insert name currently on file with Florida Dept. of State)
Pursuant to the provisions of section 620,109, Florida Statutes, this
Florida limited partnership, whose certificate was filed with the Florida
Department of State on September 25, 1992, adopts the following certificate of
amendment to its certificate of limited partnership:
FIRST: Amendment(s): (indicate article number(s) being amended, added, or
deleted)
Article XX, Section 21.5 is deleted in its entirety, and all cross
references to such section are deleted in their entirety.
SECOND: This certificate of amendment shall be effective at the time of its
filing with the Florida Department of State.
THIRD: Signature(s)
Signature of current general partner(s):
_____________________________________
James M. Seneff, Jr.
_____________________________________
Robert A. Bourne
CNL Realty Corporation
By:
___________________________________
Name:
Signature(s) of new general partner(s), if applicable: N/A
C-1
<PAGE>
Appendix D
[FORM OF OPINION]
, 1999
James M. Seneff, Jr.
Robert A. Bourne
400 East South Street
Orlando, Florida 32801
Gentlemen:
We have acted as counsel to CNL Income Fund XIV, Ltd., a Florida limited
partnership (the "Partnership") of which you are the general partners (the
"General Partners"), in connection with the proposed amendment (the "Proposed
Amendment") to the Amended and Restated Agreement of Limited Partnership of CNL
Income Fund XIV, Ltd. (the "Partnership Agreement"). The Partnership Agreement
requires that in connection with any proposed amendment to the Partnership
Agreement (other than ministerial amendments and those amendments dealing with
the transfer of a limited partner's partnership interest or the admission of
substituted or additional limited partners), the General Partners must obtain
an opinion of counsel concerning whether such proposed amendment would result
in changing the Partnership to a general partnership. The Proposed Amendment
would delete the provision in the Partnership Agreement that prohibits the
Partnership from participating in any transaction involving (i) the
acquisition, merger, conversion, or consolidation, either directly or
indirectly, of the Partnership, and (ii) the issuance of securities of any
other partnership, real estate investment trust, corporation trust or other
entity that would be created or would survive after the successful completion
of such transaction.
This opinion is furnished pursuant to the Partnership Agreement. In
rendering our opinion, we have examined and relied on the Partnership
Agreement, the Proposed Amendment, and the Certificate of Limited Partnership
of the Partnership. We have, in addition, made such other inquiries of fact and
examinations of law as we have deemed necessary for purposes of rendering this
opinion.
We are members of the Bar of the State of Florida and do not hold ourselves
out as being conversant with the laws of any jurisdiction other than those of
the State of Florida and are expressing no opinion as to the laws of any
jurisdiction other than those of the State of Florida and our opinion is so
limited.
In rendering the opinion set forth below, we have assumed: the genuineness
of all signatures on records, certificates, instruments, agreements and other
documents submitted to us for examination; the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, photostatic, facsimile, reproduced, or
conformed copies and the authenticity of the originals of such latter
documents; the accuracy and completeness of all factual representations made in
the above-referenced documents; and the legal capacity of all natural persons.
Based upon the foregoing and subject to the limitations and qualifications
hereinafter set forth, we are of the opinion that the Proposed Amendment to the
Partnership Agreement would not result in changing the Partnership to a general
partnership.
This opinion letter is based upon and limited to laws of the State of
Florida as in effect on the date of this letter and to our current knowledge of
facts in existence as of the date of this letter and material to the opinions
expressed in this letter. This opinion letter is rendered as of the date
hereof, and does not purport to analyze, evaluate or consider the legal effect
of any event, legal or factual, occurring after such date that may alter the
validity, effect or contents of this opinion, and we assume no obligation to
update the opinion set forth herein.
<PAGE>
This opinion letter is limited to the matters expressly set forth in this
letter, and no other statement or opinions should be inferred beyond the
matters expressly stated.
Except as agreed by us in writing, our opinion is solely for the benefit of
the addressees shown on the first page hereof and the limited partners of the
Partnership and may be relied upon by such parties solely for the purposes for
which it is being furnished. Without our prior written consent, this opinion
letter may not be used, circulated, quoted or otherwise referred to for any
purpose except as stated herein.
Very truly yours,
Baker & Hostetler LLP
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND XV, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund XV, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly-owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999, and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties on a triple-net
basis, APF has the ability to offer a complete range of restaurant property
services to operators of national and regional restaurant chains, from triple-
net leasing and mortgage financing to site selection, construction management
and build-to-suit development. If APF acquires all of the Income Funds in the
Acquisition, APF expects to have total assets of approximately $1.5 billion at
the time of the consummation of the Acquisition and will be one of the largest
triple-net lease REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 1,866,951 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is uncertain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for
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trading on the NYSE. We do not know the value at which an APF Share will trade
on the NYSE upon listing. It is possible that the APF Shares will trade at
prices substantially below the exchange value. APF has, however, recently sold
$750 million of APF Shares through three public offerings. In each offering,
the offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At March 31, 1999, APF has invested all of the net offering proceeds to acquire
restaurant properties and to make mortgage loans, to pay fees and other
expenses.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the Acquisition?
There are a number of material risks and considerations that you should
consider, including:
. We are uncertain as to the value at which APF Shares will trade
following listing.
. We have material conflicts in light of our being both general partners
of the Income Funds and members of APF's Board of Directors.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. As stated below, the Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding limited partnership units. Such an approval
by your Income Fund's Limited Partners will be binding on you even if you vote
against the Acquisition.
Did you receive a fairness opinion in connection with APF's acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
with respect to the fairness, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the colored
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's acquisition of your
Income Fund. If you prefer, you may instead vote by telephone, following the
instructions on your consent form. If you sign and send in your consent form
and do not indicate how you want to vote, your consent form will be counted as
a vote "For" the Acquisition. If you do not vote or you abstain from voting, it
will count as a vote "Against" the Acquisition.
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<PAGE>
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2004 in an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only receive the notes option if you vote
"Against" the Acquisition, and you elect to receive the notes on your consent
form. You will receive APF Shares if your Income Fund elects to be acquired in
the Acquisition and you vote "For" the Acquisition, or you vote "Against" the
Acquisition and do not affirmatively select the notes option on your consent
form. In addition, if Limited Partners in your Income Fund elect to receive
notes in an amount greater than 15% of the estimated value of APF Shares, based
on the exchange value, to be paid to your Income Fund, then APF has the right
to decline to acquire your Income Fund. The notes will not be listed on any
exchange or automated quotation system, and a market for the notes will not
likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
person subject to income taxation or a tax-paying entity and you receive APF
Shares, the tax that you must pay will generally be based on the difference
between the value of the APF Shares you receive and the tax basis of your
units. If you elect to receive notes, your tax will be based upon your
allocable share of the gain which will be recognized by your Income Fund; your
Income Fund's gain will generally equal the excess, if any, of the value of the
APF Shares received by your Income Fund over the tax basis of your Income
Fund's net assets. Some of the gain may be subject to the 25% rate of tax
applicable to certain types of real property gain.
We urge you to consult with your tax advisor to evaluate the taxes that will be
incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that your loss per average
$10,000 investment in your Income Fund will be $(140). To review the tax
consequences to the Limited Partners of the Income Funds in greater detail, see
pages 180 through 194 of the consent solicitation and "Federal Income Tax
Considerations" in this supplement.
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RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds acquired by
APF may be differently constructed, located in a different geographic area or
of a different restaurant chain than the restaurant properties owned by your
Income Fund. Because the market for real estate may vary from one region of the
country to another, the change in geographic diversity may expose you to
different and greater risks than those to which you are presently exposed. For
geographic information regarding APF's and the Income Funds' restaurant
properties, see "APF's Business and The Restaurant Properties--Business
Objectives and Strategies" and "--The Restaurant Properties--General" and
"Business of the Income Funds--Description of Restaurant Properties" in the
consent solicitation.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund. This description is qualified in its entirety
by the more detailed discussion in the section entitled "Risk Factors"
contained in the consent solicitation.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease below the exchange value upon listing.
Your Income Fund will be receiving 1,866,951 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares will trade at prices substantially below
the exchange value or the historical book value of the assets of APF. The APF
Shares have been approved for listing on the NYSE, subject to official notice
of issuance. Prior to listing, the existing APF stockholders have not had an
active trading market in which they could sell their APF Shares. Additionally,
any Limited Partners of the Funds who become APF stockholders as a result of
the Acquisition, will have transformed their investment in non-tradable units
into an investment in freely tradable APF Shares. Consequently, some of these
stockholders may choose to sell their APF Shares upon listing at a time when
demand for APF Shares may be relatively low. The market price of the APF Shares
may be volatile after the Acquisition, and the APF Shares could trade at prices
substantially less than the exchange value as a result of increased selling
activity following the issuance of the APF Shares, the interest level of
investors in purchasing the APF Shares after the Acquisition and the amount of
distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund made $820, $850 and $800, respectively, in distributions per $10,000
investment to you. While historically, APF has made distributions equal to
7.625% per APF Share, based on the exchange value, we cannot be sure that APF
will be able to maintain this level of distributions in the future. In the
event that APF is unable to maintain this level of distributions in the future,
your distributions per $10,000 investment may decrease substantially after the
Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have two material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne have a different interest in the completion of the Acquisition which
may conflict with your interest as a Limited Partner of the Income Fund
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or with their own positions as the general partners of your Income Fund.
Second, while we will not receive any APF Shares as a result of APF's
Acquisition of your Income Fund, we, as general partners of your Income Fund,
may be required to pay all or a substantial portion of the Acquisition costs
allocated to your Income Fund to the extent that you or other Limited Partners
of your Income Fund vote against the Acquisition. For additional information
regarding the Acquisition costs allocated to your Income Fund, see "Comparison
of Alternative Effect on Financial Condition and Results of Operations"
contained in this supplement.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own and lease on a triple-net basis, on the date that the Acquisition
is consummated, assuming only your Income Fund was acquired as of March 31,
1999, 563 restaurant properties. The risks inherent in investing in an
operating company such as APF include that APF may invest in new restaurant
properties that are not as profitable as APF anticipated, may incur substantial
indebtedness to make future acquisitions of restaurant properties which it may
be unable to repay and may make mortgage loans to prospective operators of
national and regional restaurant chains which may not have the ability to
repay.
Also, any investment in APF may not outperform your investment in your
Income Fund. Your investment will change from one in which you are generally
entitled to receive distributions from any net proceeds of a sale or
refinancing of your Income Fund's assets, to an investment in an entity in
which you may realize the value of your investment only through sale of your
APF Shares, not from liquidation proceeds from restaurant properties.
Continuation of your Income Fund would, on the other hand, permit you
eventually to receive liquidation proceeds, if any, from the sale of the Income
Fund's restaurant properties, and your share of these sale proceeds could be
higher than the amount realized from the sale of your APF Shares or from the
combination of cash paid to and payments on any notes if you elect to receive
the notes.
You may not receive the potential appreciation of your Income Fund's restaurant
property portfolio if your Income Fund is acquired.
Your Income Fund's partnership agreement provides that unless earlier
terminated pursuant to its terms, your Income Fund will be terminated,
dissolved, and its assets liquidated on December 31, 2031. At the time of your
Income Fund's formation, we contemplated that its investment program would
terminate and its investments would be liquidated some time between 2001 and
2006. If your Income Fund is acquired by APF in the Acquisition, your Income
Fund will be liquidated prior to the originally contemplated timeframe. Due to
the lack of certainty with respect to the potential appreciation of APF Shares,
an investment in APF Shares may not outperform the potential appreciation of
your investment in your Income Fund if your Income Fund had remained in
existence at least until the contemplated liquidation date.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default 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.
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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. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances APF would also have to seek a
different source for funding its operations than securitizations.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholders distributions..
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to Fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
March 31, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.62x and its ratio of debt-to-total assets was
28.02%. If only your Income Fund were acquired as of that date, APF's debt
service ratio would have been 3.77x and its ratio of debt-to-total assets would
have been 27.05%. Up through the time immediately prior to of the consummation
of the Acquisition, as a general policy, APF's Board of Directors has allowed
APF to borrow funds only when the ratio of debt-to-total assets of APF is 45%
or less. APF's organizational documents, however, do not contain any limitation
on the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make
distributions to its stockholders.
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APF's ability to incur additional secured debt may dilute the value of the
notes held by former Limited Partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgages. APF
typically does not require that a third party guarantee the obligations of the
tenant or the borrower. The ability of the tenants or borrowers to pay their
obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to: (1)
national, regional and local economic conditions which may be adversely
affected by industry slowdowns, employer relocations, prevailing employment
conditions and other factors, and which may reduce consumer demand for the
products offered by APF's customers; (2) local real estate conditions; (3)
changes or weaknesses in specific industry segments; (4) perceptions by
prospective customers of the safety, convenience, services and attractiveness
of the restaurant chain; (5) changes in demographics, consumer tastes and
traffic patterns; (6) the ability to obtain and retain capable management; (7)
changes in laws, building codes, similar ordinances and other legal
requirements, including laws increasing the potential liability for
environmental conditions existing on properties; (8) the inability of a
particular restaurant chain's computer system, or that of its franchisor or
vendors, to adequately address Year 2000 issues; (9) increases in operating
expenses; and (10) increases in minimum wages, taxes, including income,
service, real estate and other taxes, or mandatory employee benefits.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as a stockholder, would be reduced substantially for
each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to certain adjustments that are unique to REITs, a REIT generally
must distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
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Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
For a more detailed discussion of the risks associated with the Acquisition,
see "Risk Factors" in the consent solicitation.
CONSIDERATION PAID TO INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth information regarding the estimated value of
the consideration that your Income Fund will receive in the Acquisition. The
APF Shares payable to your Income Fund will not change if APF acquires fewer
than all of the Income Funds in the Acquisition. This data assumes that none of
the Limited Partners of your Income Fund have elected to receive the notes. You
should note that the APF shares may trade at prices substantially below the
exchange value upon listing on the NYSE.
<TABLE>
<CAPTION>
Estimated Value
Original Limited Original Limited Estimated of APF Shares
Partner Partner Investments Value of per Average
Investments Less Less Any Distributions Number of APF Estimated APF Shares $10,000
Any Distributions of Net Sales Proceeds Shares Value of APF Estimated after Original
of Net per $10,000 Offered to Shares Payable Acquisition Acquisition Limited Partner
Sales Proceeds(1) Original Investment(1) Income Fund to Income Fund Expenses Expenses Investment
- ----------------- ---------------------- ------------- -------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$40,000,000 $10,000 1,866,951 $37,339,020 $422,000 $36,917,020 $9,229
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due , 2004.
The payment received by you and other Limited Partners who elect to receive
notes will be equal to 97% of the value of your portion of the APF Share
consideration, based on the exchange value, that would otherwise have been paid
to your Income Fund. The notes will bear interest at 7.0% and will mature on
, 2004. APF may redeem the notes at any time prior to their maturity at a
price equal to the sum of the outstanding principal balance plus accrued
interest. For more detailed information, see "The Acquisition" and "Description
of the Notes" in the consent solicitation.
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
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If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1)...................................................... $ 21,758
Appraisals and Valuation(2)........................................ 8,080
Fairness Opinions(3)............................................... 30,000
Solicitation Fees(4)............................................... 14,819
Printing and Mailing(5)............................................ 96,919
Accounting and Other Fees(6)....................................... 54,043
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Subtotal......................................................... 225,619
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(7).......................... 90,084
Legal Closing Fees(8).............................................. 44,496
Partnership Liquidation Costs(9)................................... 61,801
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Subtotal......................................................... 196,381
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Total.............................................................. $422,000
========
</TABLE>
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(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $312,063. Your
Income Fund's pro-rata portion of these fees was determined based
on the percentage of the value of the APF Share consideration
payable to your Income Fund, based on the exchange value, to the
total value of the APF Share consideration payable to all of the
Income Funds, based on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the
Income Funds in connection with the Acquisition were $105,420. Your
Income Fund's pro-rata portion of these fees was determined based
on number of restaurant properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and
incurred a fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $249,626. Your
Income Fund's pro-rata portion of these fees was determined based
on the number of Limited Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to be
$1,610,399. Your Income Fund's pro-rata portion of these fees was
determined based on the number of Limited Partners in your Income
Fund.
(6) Aggregate accounting and other fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to be
$683,904. Your Income Fund's pro-rata portion of these fees was
determined based on the percentage of your Income Fund's total
assets as of March 31, 1999 to the total assets of all of the
Income Funds as of March 31, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by
all of the Income Funds in connection with the Acquisition is
estimated to be $1,312,808. Your Income Fund's pro-rata portion of
these fees was determined based on the percentage of the value of
the APF Share consideration payable to your Income Fund, based on
the exchange value, to the total value of the APF Share
consideration payable to all of the Income Funds, based on the
exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,454. Your
Income Fund's pro-rata portion of these fees was determined based
on the percentage of your Income Fund's total assets as of March
31, 1999 to the total assets of all of the Income Funds as of March
31, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of
the Income Funds in connection with the Acquisition is estimated to
be $895,326. Your Income Fund's pro-rata portion of these costs was
determined based on the percentage of the value of the APF Share
consideration payable to your Income Fund, based on the exchange
value, to the total value of the APF Share consideration payable to
all of the Income Funds, based on the exchange value.
S-9
<PAGE>
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 80% or more in value of the Income Fund's
restaurant properties acquired within two years of the initial date of the
prospectus (February 23, 1994). Because the Acquisition of your Income Fund is
a "Liquidating Sale" within the meaning of the partnership agreement, it may
not be consummated without the approval of Limited Partners representing
greater than 50% of the outstanding units.
Required Amendment to the Partnership Agreement
Your Income Fund's partnership agreement includes one provision that may
prevent the successful completion of APF's Acquisition of your Income Fund.
This provision must be amended in order to successfully complete the
Acquisition. Therefore, if you vote "For" the Acquisition, you will also be
asked to vote in favor of this amendment. The proposed amendment is summarized
below:
. Amendment to Roll-Up Prohibition. Article 21 of the partnership
agreement currently provides that your Income Fund may not participate
in any transaction involving (i) the acquisition, merger, conversion or
consolidation, either directly or indirectly, of your Income Fund, and
(ii) the issuance of securities of any other partnership, real estate
investment trust, corporation, trust or other entity that would be
created or would survive after the successful completion of such
transaction.
If the Limited Partners holding a majority of the units approve this
amendment to your Income Fund's partnership agreement your Income Fund, Article
21 will be deleted in its entirety.
Partnership Agreement Amendment Procedures
Pursuant to Article 13 of your Income Fund's partnership agreement, we may
propose amendments to the partnership agreement. Article 13 of the partnership
agreement requires that we furnish you with a verbatim statement of the
proposed amendment, which is attached to this supplement as Appendix C, and to
include an opinion of our counsel regarding whether the proposed amendment
would result in changing your Income Fund to a general partnership, changing
our liability or your liability, or allowing you to take part in the control or
management of your Income Fund. The form of opinion of Baker & Hostetler LLP is
attached to this supplement as Appendix D.
Consequence of Failure to Approve the Acquisition or the Amendments
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition and the proposed
amendment to the partnership agreement, the Acquisition may
S-10
<PAGE>
not be consummated under the terms of the partnership agreement. In such event,
we plan to continue to operate your Income Fund as a going concern and to
eventually dispose of your Income Fund's restaurant properties approximately 7
to 12 years after they were acquired or as soon thereafter if, in our opinion,
market conditions permit, as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at
. We and members of APF's management
intend to solicit actively your support for the Acquisition and would like to
use the special meeting to answer questions about the Acquisition and the
solicitation materials and to explain in person our reasons for recommending
that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the consent form constitute the solicitation
materials being distributed to you and the other Limited Partners to obtain
their votes "For" or "Against" the Acquisition of your Income Fund by APF.
Please note that we refer, collectively, to the power of attorney and Limited
Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning on attending the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about
, 1999 and will continue until the later of (a) , 1999 a date not less
than 60 calendar days from the initial delivery of the solicitation materials,
or (b) such later date as we may select and as to which we give you notice. At
our discretion, we may elect to extend the solicitation period. Under no
circumstances will the solicitation period be extended beyond March 31, 2000.
Any consent form received by Corporate Election Services prior to 5:00 p.m.,
Eastern time, on the last day of the solicitation period will be effective
provided that such consent form has been properly completed and signed. If you
fail to return a signed consent form by the end of the solicitation period,
your units will be counted as voting "Against" the Acquisition of your Income
Fund and you will receive APF Shares if your Income Fund is acquired. If you
prefer, you may instead vote by telephone according to the instructions on your
consent form.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote -- Required Amendment to the Partnership Agreement." If
you have interests in more than one Income Fund, you will receive multiple
consent forms which will provide for separate votes for each Income Fund in
which you own an interest. If you return a signed consent form but fail to
indicate whether you are voting "For" or "Against" any matter, you will be
deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all
S-11
<PAGE>
other documents and instruments advisable or necessary to complete the
Acquisition. The power of attorney is intended solely to ease the
administrative burden of completing the Acquisition without requiring your
signatures on multiple documents.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the quarter
ended March 31, 1999, the aggregate amounts accrued or paid by your Income Fund
to us are shown below under "Historical Distributions Paid to the General
Partners and Affiliates" and the estimated amounts of compensation that would
have been paid had the Acquisition been in effect for the periods presented,
are shown below under "Pro Forma Distributions to Be Paid to the General
Partners following the Acquisition":
<TABLE>
<CAPTION>
Year Ended December 31, Quarter Ended
-------------------------- March 31,
1996 1997 1998 1999
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the
General Partners and Affiliates:
General Partner Distributions...... -- -- -- --
Accounting and Administrative
Services.......................... $ 87,265 $ 78,051 $ 92,573 $25,551
Broker/Dealer Commissions
Property Management Fees........... 35,126 35,321 33,990 8,051
Due Diligence and Marketing Support
Fees.............................. -- -- -- --
Acquisition Fees................... -- -- -- --
Asset Management Fees.............. -- -- -- --
Real Estate Disposition Fees(1).... -- -- -- --
-------- -------- -------- -------
Total historical................. $122,391 $113,372 $126,563 $33,602
Pro Forma Distributions to Be Paid to
the General Partners following the
Acquisition:
Cash Distributions on APF Shares... -- -- -- --
Salary Compensation................ -- -- -- --
-------- -------- -------- -------
Total pro forma.................. -- -- -- --
======== ======== ======== =======
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to certain minimum
returns to the Limited Partners. To date, no such fees have been paid since
the required minimum returns have not been made to the Limited Partners.
S-12
<PAGE>
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
contained herein under the caption "Financial Statements" and in the consent
solicitation under the caption "Summary -- Our Reasons for Supporting the
Acquisition -- Prices for Income Fund Units."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31, 1999
------------------------ --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income....... $406 $725 $820 $850 $654 $169 $119
Distributions from Return of
Capital........................ 3 -- -- -- 146 31 80
---- ---- ---- ---- ---- ---- ----
Total........................... $409 $725 $820 $850 $800 $200 $199
==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from certain non-cash
items. This amount is not required to be presented as a return of capital
except for purposes of this table, and the Income Fund has not treated this
amount as a return of capital for any other purpose.
Cash distributions for the years ended December 31, 1997 include $250,000 of
amounts earned in 1997, but declared payable in the first quarter of 1998.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses during 1999. Thus, the pro forma information regarding
the distributions to APF stockholders for the quarter ended March 31, 1999 is
not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the Acquisition
with those of several alternatives, the Acquisition is more economically
attractive to you and the other Limited Partners than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and alternatives to the
Acquisition and a review of the financial condition and performance of APF and
your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income
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<PAGE>
Fund and is subject to certain closing conditions. Second, if your Income Fund
is acquired, all Limited Partners of your Income Fund who vote against the
Acquisition will be given the option of receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others, that we will be relieved
from certain ongoing liabilities with respect to Income Fund if it is acquired
by APF. For a further discussion of the conflicts of interest and potential
benefits of the Acquisition to us, see "Conflicts of Interest" below.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the values of the
consideration which would have been received by you and the other Limited
Partners in alternative transactions and concluded that the Acquisition is fair
based on such comparison. In addition, we believe the Acquisition is the best
way to maximize the return on your investment because of your ability to
participate in the potential appreciation of APF Shares. Since the investment
in your Income Fund is an investment in a static portfolio due to the
restrictions contained in your Income Fund's partnership agreement and limited
capital resources, your investments have less of an opportunity to appreciate.
Because APF is a growth-oriented operating company, you will have the
opportunity, as an APF stockholder, to participate in APF's future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinions of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinions of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) notwithstanding that Legg
Mason has previously provided investment banking services to the Income Funds
and to Commercial Net Lease Realty, Inc., an affiliate of CNL Group, Inc., and
(3) Valuation Associates has previously performed valuation appraisals for APF.
See "Reports, Opinions and Appraisals" in the consent solicitation.
On rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to, any other
aspect of the Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition
or the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
S-14
<PAGE>
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Funds or their
assets. Legg Mason's opinion also does not compare the relative merits of the
Acquisition with those of any other transaction or business strategy which were
or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of the Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a ongoing concern. On the basis of these calculations, we believe that
the ultimate value of the APF Shares will exceed the going concern value and
liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Net Book Value of the Income Fund. We calculated the book value of your
Income Fund under generally accepted accounting principles, or GAAP, as of
March 31, 1999 per average $10,000 original investment. Since the calculation
of the book value was done on a GAAP basis, it is primarily based on historical
cost and, therefore, it is not indicative of the true fair market value of your
Income Fund. This figure was compared to three other figures:
(1) the value of the Income Fund if it commenced an orderly liquidation
of its investment portfolio on December 31, 1998,
(2) the value of the Income Fund if it continued to operate in
accordance with its existing partnership agreement and business plans, and
(3) the estimated value of the APF Shares, based on the exchange value,
paid to each Income Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Original Estimated Value of
Limited Partner APF Shares per
Investments Less Average $10,000
any Distributions GAAP Book Liquidation Going Concern Original Limited
of Sales Proceeds(1) Value Value(2) Value(2) Partner Investment
-------------------- --------- ----------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
CNL Income Fund XV,
Ltd. .................. $10,000 $8,837 $8,291 $9,182 $9,229
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
(2) Liquidation and going concern values were based on appraisals prepared by
Valuation Associates. For a complete description of the methodologies
employed by Valuation Associates, see "Reports, Opinions and Appraisals" in
the Prospectus/Consent Solicitation Statement.
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<PAGE>
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have contractual
obligations pursuant to your Income Fund's partnership agreement and state law
to assess whether the terms of the Acquisition are fair and equitable to the
Limited Partners of your Income Fund without regard to whether the Acquisition
is fair and equitable to any of the other participants, including the Limited
Partners in other Income Funds. James M. Seneff, Jr. and Robert A. Bourne act
as the individual general partners of all of the Income Funds and also as
members of the Board of Directors of APF. While Messrs. Seneff and Bourne have
sought faithfully to discharge their obligations to your Income Fund, there is
an inherent conflict of interest in serving, directly or indirectly, in a
similar capacity with respect to your Income Fund and also on APF's Board of
Directors.
Lack of Independent Representation
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We have
been the parties responsible for structuring all the terms and conditions of
the Acquisition. Legal counsel engaged to assist with the preparation of the
documentation for the Acquisition, including this consent solicitation, was
engaged by us and did not serve, or purport to serve, as legal counsel for the
Income Funds or Limited Partners. If an independent representative had been
retained for the Income Funds, the terms of the Acquisition may have been
different and possibly more favorable to the Limited Partners. In particular,
had separate representation for each of the Income Funds been arranged by us,
issues unique to the value of each of the specific Income Funds might have been
highlighted or received greater attention, resulting in adjustments to the
value assigned to the assets of such Income Funds and increasing the number of
APF Shares or notes that would be allocable to such Income Fund if acquired in
the Acquisition.
Benefits to General Partners
As a result of the Acquisition assuming only your Income Fund is acquired,
we are expected to receive two material benefits. These benefits include:
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr.
Seneff serving as Chairman of APF and Mr. Bourne serving as Vice
Chairman. Furthermore, they will be entitled to receive performance-
based incentives, including stock options, under APF's 1999 Performance
Incentive Plan or any other such Plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of the Income Funds, we are legally liable for all
of Income Funds liabilities to the extent that the Income Funds are
unable to satisfy such liabilities. Because the partnership agreement
for each Income Fund prohibits the Income Funds from incurring
indebtedness, the only liabilities the Income Funds have are liabilities
with respect to their ongoing business operations. In the event that one
or more Income Funds are acquired by APF, we would be relieved of our
legal obligation to satisfy the liabilities of the acquired Income Fund
or Income Funds.
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<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Certain Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund. If
your Income Fund is acquired by APF, and you have voted "For" the Acquisition,
you will receive APF Shares. If you have voted "Against" the Acquisition but
your Income Fund is acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under certain circumstances, even
if APF were to make the same level of distributions as your Income Fund, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you. For certain other differences attributable to APF's status as a REIT,
see " Taxation of APF" and " Taxation of Stockholders Taxable Domestic
Stockholders" in the consent solicitation.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain and loss based on the
exchange value, for an average $10,000 original Limited Partner investment in
your Income Fund, is set forth in the table below for those Limited Partners
subject to federal income taxation.
S-17
<PAGE>
<TABLE>
<CAPTION>
Estimated Gain/(Loss)
per Average $10,000
Original Limited
Partner Investment(1)
---------------------
<S> <C>
CNL Income Fund XV, Ltd. ................................. $(140)
</TABLE>
- --------
(1) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be at prices significantly below the exchange value.
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one more individuals or entities in exchange for the stock of that corporation,
and (2) immediately after the exchange, such individuals or entities are in
control of the corporation. For purposes of section 351(a), control is defined
as the ownership of stock possessing at least 80 percent of the total combined
voting power of all classes of stock entitled to vote and at least 80 percent
of the total number of shares of all other classes of stock of the corporation.
APF has represented to Shaw Pittman, APF's tax counsel, that, following the
Acquisition, the Limited Partners of the Income Funds will not own stock
possessing at least 80 percent of the total combined voting power of all
classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if
any, assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and/or notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2004, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, and that is assumed or taken subject to by
the Operating Partnership. The exact amount of the gain to be recognized by
your Income Fund in the year of the Acquisition will also vary depending upon
the decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable assets used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section
S-18
<PAGE>
1231 gains and losses that you recognize in that year. If the result is a net
loss, such loss is characterized as an ordinary loss. If the result is a net
gain, it is characterized as a capital gain, except that the gain will be
treated as ordinary income to the extent that you have "non-recaptured section
1231 losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive cash and Notes rather than APF
Shares. Even though a Limited Partner's election of the notes may decrease the
amount of gain your Income Fund recognizes, the electing Limited Partner still
will be required to take into account his, her or its share of your Income
Fund's gain as determined under the partnership agreement of your Income Fund.
Therefore, Limited Partners who elect the notes may recognize gain in the year
of the Acquisition despite the fact that they will not receive cash with which
to pay the tax on the gain. Such Limited Partners will adjust the basis of the
Notes as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes. See "-- Tax Consequences of Liquidation and
Termination of Your Income Fund" below.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition including gain or loss resulting from the Acquisition. If
your taxable year is not the calendar year, you could be required to recognize
as income in a single taxable year your share of your Income Fund's income
attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units. Your holding period for
the notes for purposes of determining capital gain or loss from the disposition
of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501(c)(7), (9), (17) or (20)
an organization described in section 501(c)(7) (social clubs), section
501(c)(9) (voluntary employees' beneficiary associations), section 501(c)(17)
(supplemental unemployment benefit trusts) or section 501(c)(20) (qualified
group legal services plans) of the Code. If you are included in one of the four
classes of exempt organizations noted in the previous sentence, you may
recognize and be taxed on gain or loss on the Acquisition.
S-19
<PAGE>
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
For a discussion of the taxation of APF, see "Federal Income Tax
Considerations -- Taxation of APF" in the consent solicitation.
S-20
<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 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 2,307,364 1,391,466 8,137 (2,450,663)(b),(c)
Interest and
Other Income..... 2,214,763 0 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 0 1,095,269 2,563,714 1,323,577 64,186 (377,734)(e)
Management and
Advisory Fees.... 697,364 0 697,364 0 0 611,196 (1,308,560)(f)
Fees to Related
Parties.......... 0 0 0 23,326 292,575 0 (292,786)(g)
Interest
Expense.......... 0 0 0 50,730 0 4,769,268 0
State Taxes...... 235,208 0 235,208 0 0 0 0
Depreciation--
Other............ 0 0 0 39,581 26,238 0 0
Depreciation--
Property......... 1,548,813 349,465(a) 1,898,278 0 0 0 0
Amortization..... 7,368 0 7,368 0 0 0 536,542 (h)
Transaction
Costs............ 125,926 0 125,926 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
Total Expenses.. 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650 (1,442,538)
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) $ (946,057)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 0 17,271 0 0 0 0
Gain on Sale of
Properties....... 0 0 0 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 (215,797) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
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) (946,057)
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) $(1,194,736)
=========== ========== =========== ========== ========== ========== ===========
<CAPTION>
Historical
CNL Income Acquisitions
Combined Fund XV, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $14,523,161 $ 804,208 $ 11,890(j) $15,339,259
Fees............. 1,256,304 0 ( 23,253)(k) 1,233,051
Interest and
Other Income..... 7,687,325 11,104 0 7,698,429
------------ ---------- ------------------ ------------
Total Revenue... $23,466,790 $815,312 $(11,363) $24,270,739
Expenses:
General and
Administrative... 4,669,012 57,611 ( 26,638)(l),(m) 4,699,985
Management and
Advisory Fees.... 0 8,051 (8,051)(n) 0
Fees to Related
Parties.......... 23,115 0 0 23,115
Interest
Expense.......... 4,819,998 0 0 4,819,998
State Taxes...... 235,208 21,191 7,614 (o) 264,013
Depreciation--
Other............ 65,819 0 0 65,819
Depreciation--
Property......... 1,898,278 74,838 14,696 (p) 1,987,812
Amortization..... 543,910 661 0 544,571
Transaction
Costs............ 125,926 32,820 0 158,746
------------ ---------- ------------------ ------------
Total Expenses.. 12,381,266 195,172 (12,379) 12,564,059
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties and
Provision for
Losses on
Properties....... $11,085,524 $ 620,140 $ 1,016 $11,706,680
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 61,901 (3,225)(q) 75,947
Gain on Sale of
Properties....... 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 0 (215,797)
------------ ---------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 10,886,998 682,041 (2,209) 11,566,830
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ---------- ------------------ ------------
Net Earnings
(Losses)......... $10,886,998 $ 682,041 $ (2,209) $11,566,830
============ ========== ================== ============
</TABLE>
S-21
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
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
============ =========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 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
============ =========== ============ ========== ========== ============ ===========
Weighted average
units
outstanding
during period... n/a n/a n/a n/a n/a n/a n/a
============ =========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,401 n/a 37,347,401 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 n/a 37,348,464 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... 14,237,405 n/a n/a n/a n/a n/a n/a
Cash
distributions
declared per
$10,000
Investment...... 191 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 $ -- $ -- $ -- $ 0
Mortgages/notes
receivable...... $ 41,269,740 0 $ 41,269,740 $ -- $ -- $247,896,287 $ 0
Accounts
receivable,
net............. $ 548,862 0 $ 548,862 $7,141,967 $5,457,493 $ 1,969,339 (148,629)(w)
Investment
in/due from
joint ventures.. $ 1,083,564 0 $ 1,083,564 $ -- $ -- $ -- 0
Total assets.... $708,694,145 $33,656,518(u) $742,350,663 $8,223,820 $6,308,406 $264,700,433 $31,771,317 (v1),(w)
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 $32,191,687 (v1),(x)
<CAPTION>
Historical
CNL Income
Combined Fund XV, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- ------------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 542 50 n/a 592
============== =========== ==================== ==================
Earnings per
share/unit...... $ n/a $ 0.17 $ n/a $ 0.26
============== =========== ==================== ==================
Book value per
share/unit...... $ n/a $ 8.84 $ n/a $ 16.39
============== =========== ==================== ==================
Dividends per
share/unit...... $ n/a $ 0.20 $ n/a $ n/a
============== =========== ==================== ==================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 3.26x
============== =========== ==================== ==================
Weighted average
units
outstanding
during period... n/a 4,000,000 n/a n/a
============== =========== ==================== ==================
Weighted average
shares
outstanding
during period... 43,497,401 n/a 1,845,851 45,343,252 (r)
============== =========== ==================== ==================
Shares
outstanding..... 43,498,464 n/a 1,845,851 45,344,315
============== =========== ==================== ==================
Cash
distributions
declared:....... n/a 800,000 n/a $ 19,565,285 (s)
==================
Cash
distributions
declared per
$10,000
Investment...... n/a 200 n/a $ 216 (t)
==================
Balance sheet
data:
Real estate
assets, net..... $ 647,547,023 $30,668,303 $5,397,069 (v2) $ 683,612,395
Mortgages/notes
receivable...... $ 289,166,027 $ -- $ 0 $ 289,166,027
Accounts
receivable,
net............. $ 14,969,032 $ 38,803 $ (10,561)(y) $ 14,997,274
Investment
in/due from
joint ventures.. $ 1,083,564 $ 2,746,481 $ 760,356 (v2) $ 4,590,401
Total assets.... $1,053,354,639 $36,224,559 $1,558,510 (v2),(y) $1,091,137,708
Total
liabilities..... 346,929,801 $ 876,618 $ (10,561)(y) $ 347,795,858
Total equity.... $ 706,424,838 $35,347,941 $1,569,071 (v2) $ 743,341,850
</TABLE>
S-22
<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
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<CAPTION>
<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 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
</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>
<CAPTION>
<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>
(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)
<TABLE>
<S> <C>
Amortization of goodwill $536,542
</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 $11,890 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the Income Fund as if the leases had been
acquired on January 1, 1998.
S-23
<PAGE>
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<CAPTION>
<S> <C>
Management fees $ (8,051)
Reimbursement of administrative costs (15,202)
---------
$(23,253)
=========
</TABLE>
(l) Represents the elimination of $15,202 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $11,436 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 $8,051 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $7,614 resulting from
assuming that acquisitions of properties that had been operational when
APF acquired them from January 1, 1999 through May 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 Fund 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 $14,696 as a result
of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated using
the straight-line method over the remaining useful lives of the
properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $3,225
as a result of adjusting the historical basis of the real estate owned
by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings owned indirectly by the
Income Fund is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(r) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 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.
S-24
<PAGE>
(v) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Income Fund Total
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Shares Offered 3,800,000 2,350,000 1,845,850.6 7,995,850.6
Exchange Value $20 $20 $20 $20
----------- ----------- ----------- ------------
Share Consideration $76,000,000 $47,000,000 $36,917,012 $159,917,012
Cash Consideration -- -- 422,000 422,000
APF Transaction Costs 5,073,176 3,137,359 2,492,465 10,703,000
----------- ----------- ----------- ------------
Total Purchase Price $81,073,176 $50,137,359 $39,831,477 $171,042,012
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets -- Historical $ 7,141,252 $10,006,878 $35,347,941 $ 52,496,071
Purchase Price
Adjustments:
Land and buildings on
operating leases 4,299,947 4,299,947
Net investment in direct
financing leases 1,097,122 1,097,122
Investment in joint
ventures 760,356 760,356
Accrued rental income (1,655,430) (1,655,430)
Intangibles and other
assets (2,792,876) (18,459) (2,811,335)
Goodwill* 42,923,357 -- 42,923,357
Excess purchase price 73,931,924 -- -- 73,931,924
----------- ----------- ----------- ------------
Total Allocation $81,073,176 $50,137,359 $39,831,477 $171,042,012
=========== =========== =========== ============
</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 pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,931,924 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 43,291,747 relating to the acquisition
of the CNL Financial Services Group is being amortized over 20 years. APF
did not acquire any intangibles as part of any of the acquisitions. The
entries were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC)--Class A 8,600
Common Stock (CFA, CFS, CFC)--Class B 4,825
APIC (CFA, CFS, CFC) 13,857,645
Retained Earnings 3,277,060
Accumulated distributions in excess of earnings 73,931,924
Goodwill for CFC (Intangibles and other assets) 42,923,357
CFC/CFS Org Costs/Other Assets 2,792,876
Cash to pay APF transaction costs 8,210,535
APF Common Stock 61,500
APF APIC 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital 35,347,941
Land and buildings on operating leases 4,299,947
Net investment in direct financing leases 1,097,122
Investment in joint ventures 760,356
Accrued rental income 1,655,430
Intangibles and other assets 18,459
Cash to pay APF Transaction costs 2,492,465
Cash consideration to Income Funds 422,000
APF Common Stock 18,459
APF APIC 36,898,553
(To record acquisition of Income Fund)
</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 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.
(y) Represents the elimination by the Income Fund of $10,561 in related
party payables recorded as receivables by the Advisor.
S-25
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND XV, LTD.
The following table sets forth certain financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
XV, Ltd." in this supplement.
<TABLE>
<CAPTION>
Quarter Ended
March 31, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 877,213 $ 974,871 $ 3,471,040 $ 3,908,014 $ 4,068,610 $ 3,914,985 $ 1,319,692
Net income (2).......... 682,041 847,462 2,642,497 3,434,905 3,585,059 3,372,468 1,185,918
Cash distributions
declared............... 800,000 1,000,000 3,400,000 3,200,000 3,280,000 2,900,001 1,185,946
Net income per unit
(2).................... 0.17 0.21 0.65 0.85 0.89 0.83 0.41
Cash distributions
declared per
Unit (3)............... 0.20 0.25 0.85 0.80 0.82 0.73 0.41
GAAP book value per
unit................... 8.84 9.02 8.87 9.06 9.00 8.92 12.16
Weighted average number
of Limited Partner
units outstanding...... 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 2,893,690
<CAPTION>
March 31, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $36,224,559 $37,226,274 $36,359,054 $37,045,723 $36,936,678 $36,516,732 $37,058,475
Total partners'
capital................ 35,347,941 36,070,865 35,465,900 36,223,403 35,988,498 35,683,439 35,210,972
</TABLE>
- --------
(1) Revenues include equity in earnings of the joint venture and adjustments to
accrued rental income due to Long John Silver's Inc. filing for bankruptcy
and rejecting four of the Income Fund's leases.
(2) Net income for the year ended December 31, 1998, includes $280,907 from
provision for loss on land and buildings. Net income for the year ended
December 31, 1995, includes $71,023 from loss on sale of land.
(3) Distributions for the quarter ended March 31, 1998, and the years ended
December 31, 1998 and 1996 include a special distribution to the Limited
Partners of $200,000, $200,000 and $80,000, respectively, which represented
cumulative excess operating reserves.
S-26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CNL INCOME FUND XV, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
September 2, 1993, to acquire for cash, either directly or through joint
venture arrangements, both newly constructed and existing restaurants, as well
as properties upon which restaurants were to be constructed, which are leased
primarily to operators of national and regional fast-food and family-style
restaurant chains. The leases are triple-net leases with the lessee responsible
for all repairs and maintenance, property taxes, insurance and utilities. As of
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.
S-27
<PAGE>
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.
S-28
<PAGE>
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
S-29
<PAGE>
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
S-30
<PAGE>
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
S-31
<PAGE>
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
S-32
<PAGE>
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
S-33
<PAGE>
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.
S-34
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998...... F-1
Condensed Statements of Income for the Quarters Ended March 31, 1999, and
1998.................................................................... F-2
Condensed Statements of Partner's Capital for the Quarter Ended
March 31, 1999 and for the Year Ended December 31, 1998................. F-3
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998................................................................ F-4
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998........................................................... F-5
Report of Independent Accountants........................................ F-7
Balance Sheets as of December 31, 1998 and 1997.......................... F-8
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-9
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-10
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-12
Unaudited Pro Forma Financial Information................................ F-21
Unaudited Pro Forma Balance Sheet as of March 31, 1999................... F-22
Unaudited Pro Forma Statement of Earnings for the Quarter Ended March 31,
1999.................................................................... F-24
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998.................................................................... F-26
Unaudited Pro Forma Statement of Cash Flows for the Quarter Ended March
31, 1999................................................................ F-28
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................ F-30
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements.............................................................. F-32
</TABLE>
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
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-1
<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-2
<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-3
<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-4
<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.
F-5
<PAGE>
3. 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-6
<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-7
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building..................................... $23,173,909 $22,145,138
Net investment in direct financing leases.............. 7,589,694 9,264,307
Investment in joint ventures........................... 2,743,450 2,561,816
Cash and cash equivalents.............................. 1,214,444 1,614,708
Receivables, less allowance for doubtful accounts of
$849 in 1998.......................................... 62,465 26,888
Prepaid expenses....................................... 9,627 7,633
Organization costs, less accumulated amortization of
$9,549 and $7,548..................................... 451 2,452
Accrued rental income.................................. 1,565,014 1,422,781
----------- -----------
$36,359,054 $37,045,723
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 592 $ 6,991
Accrued and escrowed real estate taxes payable......... 16,019 6,158
Distributions payable.................................. 800,000 800,000
Due to related parties................................. 23,337 4,311
Rents paid in advance.................................. 53,206 4,860
----------- -----------
Total liabilities.................................... 893,154 822,320
Partners' capital...................................... 35,465,900 36,223,403
----------- -----------
$36,359,054 $37,045,723
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-8
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $2,443,550 $2,527,261 $2,527,261
Adjustments to accrued rental income....... (250,631) -- --
Earned income from direct financing
leases.................................... 937,286 1,059,530 1,069,205
Contingent rental income................... 41,463 25,791 23,318
Interest and other income.................. 62,819 56,183 55,964
---------- ---------- ----------
3,234,487 3,668,765 3,675,748
---------- ---------- ----------
Expenses:
General operating and administrative....... 137,794 135,714 149,388
Professional services...................... 26,208 24,526 19,881
Management fees to related parties......... 33,990 35,321 35,126
Real estate taxes.......................... 16,797 -- --
State and other taxes...................... 27,763 29,200 30,924
Depreciation and amortization.............. 281,888 248,348 248,232
Transaction costs.......................... 23,196 -- --
---------- ---------- ----------
547,636 473,109 483,551
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures and Provision for Loss on Land and
Buildings................................... 2,686,851 3,195,656 3,192,197
Equity in Earnings of Joint Ventures......... 236,553 239,249 392,862
Provision for Loss on Land and Buildings..... (280,907) -- --
---------- ---------- ----------
Net Income................................... $2,642,497 $3,434,905 $3,585,059
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 28,218 $ 34,349 $ 35,851
Limited partners........................... 2,614,279 3,400,556 3,549,208
---------- ---------- ----------
$2,642,497 $3,434,905 $3,585,059
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 0.65 $ 0.85 $ 0.89
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................... 4,000,000 4,000,000 4,000,000
========== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-9
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $ 46,211 $40,000,000 $ (4,085,947) $ 4,512,175 $(4,790,000) $35,683,439
Distributions to
limited partners
($0.82 per
limited partner
unit)................. -- -- -- (3,280,000) -- -- (3,280,000)
Net income............. -- 35,851 -- -- 3,549,208 -- 3,585,059
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 82,062 40,000,000 (7,365,947) 8,061,383 (4,790,000) 35,988,498
Distributions to
limited partners
($0.80 per
limited partner
unit)................. -- -- -- (3,200,000) -- -- (3,200,000)
Net income............. -- 34,349 -- -- 3,400,556 -- 3,434,905
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 116,411 40,000,000 (10,565,947) 11,461,939 (4,790,000) 36,223,403
Distributions to
limited partners
($0.85 per
limited partner
unit)................. -- -- -- (3,400,000) -- -- (3,400,000)
Net income............. -- 28,218 -- -- 2,614,279 -- 2,642,497
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $144,629 $40,000,000 $(13,965,947) $14,076,218 $(4,790,000) $35,465,900
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-10
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............. $ 3,143,119 $ 3,228,741 $ 3,378,973
Distributions from joint ventures...... 271,075 249,318 259,407
Cash paid for expenses................. (252,042) (218,106) (246,748)
Interest received...................... 54,576 46,642 43,050
----------- ----------- -----------
Net cash provided by operating
activities............................ 3,216,728 3,306,595 3,434,682
----------- ----------- -----------
Cash Flows from Investing Activities:
Investment in joint ventures........... (216,992) -- (129,939)
Return of capital from joint venture... -- 51,950 --
----------- ----------- -----------
Net cash provided by (used in)
investing activities.................. (216,992) 51,950 (129,939)
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners...... (3,400,000) (3,280,000) (3,200,000)
----------- ----------- -----------
Net cash used in financing activities.. (3,400,000) (3,280,000) (3,200,000)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ (400,264) 78,545 104,743
Cash and Cash Equivalents at Beginning
of Year................................ 1,614,708 1,536,163 1,431,420
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,214,444 $ 1,614,708 $ 1,536,163
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 2,642,497 $ 3,434,905 $ 3,585,059
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 279,051 245,563 245,563
Amortization........................... 2,837 2,785 2,669
Equity in earnings of joint ventures,
net of distributions.................. 34,522 10,069 (133,455)
Provision for loss on land and
buildings............................. 280,907 -- --
Decrease (increase) in receivables..... (33,427) 3,288 58,013
Decrease in net investment in direct
financing leases...................... 85,884 87,508 77,834
Increase in prepaid expenses........... (1,994) (584) (4,234)
Increase in accrued rental income...... (142,233) (431,079) (431,654)
Increase in accounts payable and
accrued expenses...................... 3,462 1,515 1,972
Increase (decrease) in due to related
parties............................... 16,876 2,956 (6,880)
Increase (decrease) in rents paid in
advance............................... 48,346 (50,331) 39,795
----------- ----------- -----------
Total adjustments..................... 574,231 (128,310) (150,377)
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,216,728 $ 3,306,595 $ 3,434,682
=========== =========== ===========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid at
December 31............................ $ 800,000 $ 800,000 $ 880,000
=========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-11
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund XV, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset)
(Note 4). Unearned income is deferred and amortized to income over the
lease terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to their fair
value. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that change
could occur in the near term which could adversely affect the general partners'
best estimate of net cash flows expected to be generated from its properties
and the need for asset impairment write downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to
F-12
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
decrease rental or other income or increase bad debt expense for the current
period, although the Partnership continues to pursue collection of such
amounts. If amounts are subsequently determined to be uncollectible, the
corresponding receivable and allowance for doubtful accounts are decreased
accordingly.
Investment in Joint Ventures--The Partnership accounts for its interests in
Wood-Ridge Real Estate Joint Venture and properties in Clinton, North Carolina
and Fort Myers, Florida, held as tenants-in-common with affiliates, using the
equity method since the Partnership shares control with affiliates which have
the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at
commercial banks and money market funds (some of which are backed by
government securities). Cash equivalents are stated at cost plus accrued
interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Organization Costs--Organization costs were amortized over five years using
the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs are netted against partners'
capital and represent a reduction of Partnership equity and a reduction in the
basis of each partner's investment.
Use of Estimates--The general partners of the Partnership have made a
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
2. Leases:
The Partnership leases its land or land and buildings primarily to
operators of national and regional fast-food and family-style restaurants. The
leases are accounted for under the provisions of Statement of Financial
Accounting Standards No. 13, "Accounting for Leases." Some of the leases are
classified as operating leases and some of the leases are classified as direct
financing leases. For the leases classified as direct financing leases, the
building portions of the property leases are accounted for as direct financing
leases while the land portions of the majority of these leases are operating
leases. Substantially all leases are for 15 to 20 years and provide for
minimum and contingent rentals. In addition, generally the tenant pays all
property taxes and
F-13
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, property
damage, fire and extended coverage. The lease options generally allow tenants
to renew the leases for two to five successive five-year periods subject to the
same terms and conditions as the initial lease. Most leases also allow the
tenant to purchase the property at fair market value after a specified portion
of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land.................... $15,579,852 $15,579,852
Buildings............... 8,955,616 7,366,887
----------- -----------
24,535,468 22,946,739
Less accumulated
depreciation........... (1,080,652) (801,601)
----------- -----------
23,454,816 22,145,138
Less allowance for loss
on land and buildings.. (280,907) --
----------- -----------
$23,173,909 $22,145,138
=========== ===========
</TABLE>
During the year ended December 31, 1998, the Partnership established an
allowance for loss on land and buildings of $280,907 for financial reporting
purposes relating to two of the four Long John Silver's properties whose leases
were rejected by the tenant as a result of the tenant filing for bankruptcy.
The loss represents the difference between the carrying value of the properties
at December 31, 1998 and the current estimated net realizable value for these
properties.
Generally, the leases provide for escalating guaranteed minimum rents
throughout the lease term. Income from these scheduled rent increases is
recognized on a straight-line basis over the terms of the leases. For the years
ended December 31, 1998, 1997 and 1996, the Partnership recognized $142,233
(net of $250,631 in write-offs), $431,079, and $431,654, respectively, of such
rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 2,079,263
2000.......................................................... 2,205,272
2001.......................................................... 2,208,745
2002.......................................................... 2,239,958
2003.......................................................... 2,255,872
Thereafter.................................................... 24,476,132
-----------
$35,465,242
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
F-14
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Minimum lease payments receivable............ $ 15,275,632 $ 19,905,444
Estimated residual values.................... 2,460,656 2,873,859
Less unearned income......................... (10,146,594) (13,514,996)
------------ ------------
Net investment in direct financing leases.... $ 7,589,694 $ 9,264,307
============ ============
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 922,497
2000.......................................................... 925,241
2001.......................................................... 930,728
2002.......................................................... 953,085
2003.......................................................... 958,440
Thereafter.................................................... 10,585,641
-----------
$15,275,632
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
During the year ended December 31, 1998, four of the eight leases with Long
John Silver's, Inc. were rejected in connection with the tenant filing for
bankruptcy. As a result, the Partnership reclassified these assets from net
investment in direct financing leases to land and buildings on operating
leases. In accordance with the Statement of Financial Accounting Standards #13,
"Accounting for Leases," the Partnership recorded the reclassified assets at
the lower of original cost, present fair value, or present carrying amount. No
losses on the termination of direct financing leases were recorded for
financial reporting purposes.
5. Investment in Joint Ventures:
The Partnership has a 50 percent interest in the profits and losses of Wood-
Ridge Real Estate Joint Venture. The remaining interest in this joint venture
is held by an affiliate of the Partnership which has the same general partners.
The Partnership also has a 16 percent interest in a Property in Clinton, North
Carolina, with affiliates of the Partnership that has the same general
partners, as tenants-in-common. The Partnership accounts for its investment in
this property using the equity method since the Partnership shares control with
affiliates, and amounts relating to its investment are included in investment
in joint ventures.
In January 1997, Wood-Ridge Real Estate Joint Venture reinvested $502,598,
of the net sales proceeds from the sale of two properties during 1996 in one
property. As of December 31, 1998, the Partnership had received approximately
$52,000, representing its pro-rata share of the uninvested net sales proceeds.
As of December 31, 1998, the Partnership owned a 50 percent interest in the
profits and losses of the joint venture.
F-15
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In June 1998, the Partnership acquired a property in Fort Myers, Florida,
with an affiliate of the general partners as tenants-in-common. In connection
therewith, the Partnership contributed an amount to acquire a 15 percent
interest in such property. The Partnership accounts for its investment in this
property using the equity method since the Partnership shares control with
affiliates, and amounts relating to its investment are included in investment
in joint ventures.
Wood-Ridge Real Estate Joint Venture owns and leases six properties to
operators of national fast-food or family-style restaurants. The Partnership
and affiliates, as tenants-in-common in two separate tenancy-in-common
arrangements, each own and lease one property to an operator of national fast-
food or family-style restaurants.
The following presents the combined, condensed financial information for all
of the Partnership's investments in joint ventures at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................ $6,063,237 $5,563,722
Net investment in direct financing lease......... 826,780 --
Cash............................................. 87,245 10,890
Receivables...................................... 1,677 5,923
Accrued rental income............................ 96,768 74,001
Other assets..................................... 857 1,078
Liabilities...................................... 69,285 18,195
Partners' capital................................ 7,007,279 5,637,419
Revenues......................................... 705,002 650,354
Net income....................................... 579,480 522,611
</TABLE>
The Partnership recognized income totalling $236,553, $239,249 and $392,862
for the years ended December 31, 1998, 1997 and 1996, respectively, from these
entities.
6. Allocations and Distributions:
Generally, all net income and losses of the Partnership, excluding gains and
losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners shall be subordinated to receipt by the
limited partners of an aggregate, eight percent, cumulative, noncompounded
annual return on their invested capital contributions (the "Limited Partners'
8% Return").
Generally, net sales proceeds from the sales of properties not in
liquidation of the Partnership, to the extent distributed, will be distributed
first to the limited partners in an amount sufficient to provide them with
their Limited Partners' 8% Return, plus the return of their adjusted capital
contributions. The general partners will then receive, to the extent previously
subordinated and unpaid, a one percent interest in all prior distributions of
net cash flow and a return of their capital contributions. Any remaining sales
proceeds will be distributed 95 percent to the limited partners and five
percent to the general partners. Any gain from a sale of a property not in
liquidation of the Partnership is, in general, allocated in the same manner as
net sales proceeds are distributable. Any loss from the sale of a property is,
in general, allocated first, on a pro rata basis, to
F-16
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
partners with positive balances in their capital accounts, and thereafter, 95
percent to the limited partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the years ended December 31, 1998, 1997 and 1996, the Partnership
declared distributions to the limited partners of $3,400,000, $3,200,000 and
$3,280,000, respectively. No distributions have been made to the general
partners to date.
7. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................ $2,642,497 $3,434,905 $3,585,059
Depreciation for tax reporting
purposes in excess of depreciation
for financial reporting purposes.... (126,518) (160,007) (160,007)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................ 85,884 87,508 77,834
Allowance for loss on land and
buildings........................... 280,907 -- --
Equity in earnings of joint ventures
for tax reporting purposes in excess
of (less than) equity in earnings of
joint ventures for financial
reporting purposes.................. 33,872 23,823 (158,836)
Accrued rental income................ (142,233) (431,079) (431,654)
Rents paid in advance................ 48,346 (50,331) 39,795
Capitalization of transaction costs
for tax reporting purposes.......... 23,196 -- --
Other................................ 1,686 (670) 2,127
---------- ---------- ----------
Net income for federal income tax
purposes............................ $2,847,637 $2,904,149 $2,954,318
========== ========== ==========
</TABLE>
F-17
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
8. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors,
Inc. During the years ended December 31, 1998, 1997, and 1996, CNL Fund
Advisors, Inc. (hereinafter referred to as the "Affiliate") performed certain
services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate a management fee of one percent of the sum of gross
revenues from properties wholly owned by the Partnership and the Partnership's
allocable share of gross revenues from joint ventures. The management fee,
which will not exceed fees which are competitive for similar services in the
same geographic area, may or may not be taken, in whole or in part as to any
year, in the sole discretion of the Affiliate. All or any portion of the
management fee not taken as to any fiscal year shall be deferred without
interest and may be taken in such other fiscal year as the Affiliate shall
determine. The Partnership incurred management fees of $33,990, $35,321 and
$35,126 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the net sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. The payment of the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate 8% Preferred Return, plus
their invested capital contributions. No deferred, subordinated real estate
disposition fees have been incurred since inception.
During the years ended December 31, 1998, 1997 and 1996, the Affiliate of
the general partners provided accounting and administrative services to the
Partnership on a day-to-day basis. The Partnership incurred $92,573, $78,051
and $87,265 for the years ended December 31, 1998, 1997 and 1996, respectively,
for such services.
The due to related parties at December 31, 1998 and 1997, totalled $23,337
and $4,311, respectively.
F-18
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
9. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees or affiliated groups of lessees, each representing more than
ten percent of the Partnership's total rental and earned income (including the
Partnership's share of total rental and earned income from joint ventures) for
each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Checkers Drive-In Restaurants, Inc. .......... $719,308 $716,905 $723,558
Golden Corral Corporation..................... 595,343 582,600 531,775
Flagstar Enterprises, Inc. (and Quincy's
Restaurants, Inc. for the years ended
December 31, 1997
and 1996).................................... 541,527 635,413 638,042
Long John Silver's, Inc....................... 510,187 710,325 714,804
Foodmaker, Inc................................ 417,426 417,426 417,426
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of rental and earned income from joint ventures) for each of the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Checkers Drive-In Restaurants................. $719,308 $716,905 $723,558
Golden Corral Family Steakhouse Restaurants... 595,343 582,600 531,775
Long John Silver's............................ 573,104 773,265 777,743
Hardee's...................................... 541,527 543,889 546,037
Jack in the Box............................... 417,426 417,426 417,426
</TABLE>
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
In June 1998, the tenant of eight of the Long John Silver's Properties filed
for bankruptcy and rejected the leases relating to four Properties. The rental
income relating to these Properties will terminate until new tenants or buyers
for the Properties are located. While Long John Silver's, Inc. has not rejected
or affirmed the remaining four leases, there can be no assurance that some of
all of the leases will not be rejected in the future. The lost revenues
resulting from the four leases that were rejected, as described above, and the
possible rejection of the remaining four leases could have an adverse effect on
the results of operations of the Partnership if the Partnership is unable to
re-lease these Properties in a timely manner.
10. Subsequent Events:
In January 1999, a Boston Market tenant rejected its lease and ceased making
rental payments related to this lease.
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary
F-19
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
of APF (the "Merger"). As consideration for the Merger, APF has agreed to issue
3,733,901 shares of its common stock, par value $0.01 per share (the "APF
Shares") which, for the purposes of valuing the merger consideration, have been
valued by APF at $10.00 per APF Share, the price paid by APF investors in APF's
most recent public offering. In order to assist the general partners in
evaluating the proposed merger consideration, the general partners retained
Valuation Associates, a nationally recognized real estate appraisal firm, to
appraise the Partnership's restaurant property portfolio. Based on Valuation
Associates' appraisal, the Partnership's property portfolio and other assets
were valued on a going concern basis (meaning the Partnership continues
unchanged) at $36,726,950 as of December 31, 1998. The APF Shares are expected
to be listed for trading on the New York Stock Exchange concurrently with the
consummation of the Merger, and, therefore, would be freely tradable at the
option of the former limited partners. At a special meeting of the partners
that is expected to be held in the third quarter of 1999, limited partners
holding in excess of 50% of the Partnership's outstanding limited partnership
interests must approve the Merger prior to consummation of the transaction. The
general partners intend to recommend that the limited partners of the
Partnership approve the Merger. In connection with their recommendation, the
general partners will solicit the consent of the limited partners at the
special meeting. If the limited partners reject the Merger, the Partnership
will bear the portion of the transaction costs based upon the percentage of
"For" votes and the general partners will bear the portion of such transaction
costs based upon the percentage of "Against" votes and abstentions.
11. Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 10 being adjusted to 1,866,951 shares valued at $20.00 per
APF share.
F-20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of the Advisor
and the CNL Restaurant Financial Services Group, and the acquisition of the
Income Fund (the acquisition of the Income Fund is referred to as the
"Acquisition"), and is based on estimates and assumptions set forth below in
the notes to such information which included pro forma adjustments. This
unaudited pro forma financial information has been prepared utilizing the
historical financial statements of APF, the historical combined financial
information of the Income Fund, the Advisor and CNL Restaurant Financial
Services Group (shown separately as CFS and CFC) and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, Income Fund, Advisor and CNL Restaurant Financial Services Group. The
pro forma balance sheet assumes that the Acquisition occurred on 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.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of March 31, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL
Historical Pro Forma Historical Financial
APF Adjustments Subtotal Advisor Services, Inc.
------------ ----------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... 475,787,661 58,749,637 (A) 534,537,298 0 0
Net Investment in Direct
Financing Leases....... 123,270,117 0 123,270,117 0 0
Mortgages and Notes
Receivable............. 41,269,740 0 41,269,740 0 0
Other Investments....... 16,199,792 0 16,199,792 0 0
Investment In Joint
Ventures............... 1,083,564 0 1,083,564 0 0
Cash and Cash
Equivalents............ 35,796,119 (25,093,119)(A) 10,703,000 591,712 552,415
Restricted
Cash/Certificates of
Deposit................ 2,007,278 0 2,007,278 0 0
Receivables (net
allowances)/
Due from Related
Party.................. 548,862 0 548,862 7,141,967 5,457,493
Accrued Rental Income... 5,007,334 0 5,007,334 0 0
Other Assets............ 7,723,678 0 7,723,678 490,141 298,498
Goodwill................ 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Assets........... $708,694,145 $33,656,518 $742,350,663 $8,223,820 $6,308,406
============ =========== ============ ========== ==========
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 3,464,190 $ 0 $ 3,464,190 $ 576,531 $ 304,375
Accrued Construction
Costs Payable.......... 10,172,169 0 10,172,169 0 0
Distributions Payable... 0 0 0 119,808 0
Due to Related Parties.. 148,629 0 148,629 0 563,724
Income Tax Payable...... 0 0 0 0 0
Line of Credit/Notes
payable................ 34,150,000 33,656,518 (A) 67,806,518 386,229 0
Deferred Income......... 2,052,530 0 2,052,530 0 0
Rents Paid in Advance... 1,340,636 0 1,340,636 0 0
Minority Interest....... 280,970 0 280,970 0 0
Common Stock............ 373,483 0 373,483 0 0
Common Stock--Class A... 0 0 0 6,400 2,000
Common Stock--Class B... 0 0 0 3,600 724
Additional Paid-in-
capital................ 670,005,177 0 670,005,177 4,617,047 5,303,503
Accumulated
distributions in excess
of net earnings........ (13,293,639) 0 (13,293,639) 2,514,205 134,080
Partners Capital........ 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Liabilities and
Equity................ $708,694,145 $33,656,518 $742,350,663 $8,223,820 $6,308,406
============ =========== ============ ========== ==========
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of March 31, 1999
<TABLE>
<CAPTION>
Historical Historical
CNL Combining CNL Income
Financial Pro Forma Combined Fund XV, Pro Forma Adjusted
Corp. Adjustments APF Ltd. Adjustments Pro Forma
------------ ------------ -------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... 0 0 534,537,298 23,099,071 4,299,947 (B2) 561,936,316
Net Investment in Direct
Financing Leases....... 0 0 123,270,117 7,569,232 1,097,122 (B2) 131,936,471
Mortgages and Notes
Receivable............. 247,896,287 0 289,166,027 -- 0 289,166,027
Other Investments....... 6,353,482 0 22,553,274 0 0 22,553,274
Investment In Joint
Ventures............... 0 0 1,083,564 2,746,481 760,356 (B2) 4,590,401
Cash and Cash
Equivalents............ 4,896,688 (8,210,535)(B1) 8,533,280 1,097,083 (2,492,465)(B2) 6,715,898
(422,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 853,243 0 2,860,521 -- 0 2,860,521
Receivables (net
allowances)
/Due from Related
Party.................. 1,969,339 (148,629)(C) 14,969,032 38,803 (10,561)(E) 14,997,274
Accrued Rental Income... 0 0 5,007,334 1,655,430 (1,655,430)(B2) 5,007,334
Other Assets............ 2,731,394 (2,792,876)(B1) 8,450,835 18,459 (18,459)(B2) 8,450,835
Goodwill................ 0 42,923,357 (B1) 42,923,357 0 0 42,923,357
------------ ------------ -------------- ----------- ------------ --------------
Total Assets........... $264,700,433 $ 31,771,317 $1,053,354,639 $36,224,559 $ 1,558,510 $1,091,137,708
============ ============ ============== =========== ============ ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 1,613,959 $ 0 $ 5,959,055 $ 52,753 $ 0 $ 6,011,808
Accrued Construction
Costs Payable.......... 0 0 10,172,169 0 0 10,172,169
Distributions Payable... 0 0 119,808 800,000 0 919,808
Due to Related Parties.. 31,310,681 (148,629)(C) 31,874,405 10,561 (10,561)(E) 31,874,405
Income Tax Payable...... 271,741 (271,741)(D) 0 0 0 0
Line of Credit/Notes
payable................ 226,937,481 0 295,130,228 0 0 295,130,228
Deferred Income......... 0 0 2,052,530 0 0 2,052,530
Rents Paid in Advance... 0 0 1,340,636 13,304 0 1,353,940
Minority Interest....... 0 0 280,970 0 0 280,970
Common Stock............ 0 61,500 (B1) 434,983 0 18,459 (B2) 453,442
Common Stock--Class A... 200 (8,600)(B1) 0 0 0 0
Common Stock--Class B... 501 (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 3,937,095 122,938,500 (B1) 792,943,677 0 36,898,553 (B2) 829,842,230
(13,857,645)(B1)
Accumulated
distributions in excess
of net earnings........ 628,775 (3,277,060)(B1) (86,953,822) 0 0 (86,953,822)
(73,931,924)(B1)
271,741 (D)
Partners Capital........ 0 0 0 35,347,941 (35,347,941)(B2) 0
------------ ------------ -------------- ----------- ------------ --------------
Total Liabilities and
Equity................ $264,700,433 $ 31,771,317 $1,053,354,639 $36,224,559 $ 1,558,510 $1,091,137,708
============ ============ ============== =========== ============ ==============
</TABLE>
F-23
<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
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $12,184,008 $2,339,153(a) $14,523,161 $ 0 $ 0 $ 0
Fees................... 0 0 0 2,307,364 1,391,466 8,137
Interest and Other
Income................ 2,214,763 0 2,214,763 47,213 129,362 5,233,919
----------- ---------- ----------- ---------- ---------- ----------
Total Revenue.......... $14,398,771 $2,339,153 $16,737,924 $2,354,577 $1,520,828 $5,242,056
Expenses:
General and
Administrative
Expenses.............. 1,095,269 0 1,095,269 2,563,714 1,323,577 64,186
Management and Advisory
Fees.................. 697,364 0 697,364 0 0 611,196
Fees Paid to Related
Parties............... 0 0 0 23,326 292,575 0
Interest Expense....... 0 0 0 50,730 0 4,769,268
State Taxes............ 235,208 0 235,208 0 0 0
Depreciation--Other.... 0 0 0 39,581 26,238 0
Depreciation--
Property.............. 1,548,813 349,465(a) 1,898,278 0 0 0
Amortization........... 7,368 0 7,368 0 0 0
Transaction Costs...... 125,926 0 125,926 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
Total Expenses......... 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, 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)
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 17,271 0 17,271 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Provision For Loss on
Properties............ (215,797) 0 (215,797) 0 0 0
----------- ---------- ----------- ---------- ---------- ----------
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)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 127,496 48,017 73,166
----------- ---------- ----------- ---------- ---------- ----------
Net Earnings (Losses)... $10,490,297 $1,989,688 $12,479,985 $ (195,278) $ (73,545) $ (129,428)
=========== ========== =========== ========== ========== ==========
Earnings Per
Share/Unit............. $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ==========
Book Value Per
Share/Unit............. $ 17.59 $ 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
=========== ========== =========== ========== ========== ==========
Ratio of Earnings to
Fixed Charges.......... 50.03x n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========== ==========
Wtd. Avg. Units
Outstanding............ 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
=========== ========== =========== ========== ========== ==========
Shares Outstanding...... 37,348,464 n/a 37,348,464 n/a n/a n/a
=========== ========== =========== ========== ========== ==========
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 Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Historical
Combining CNL
Pro Forma Combined Income Fund Pro Forma Adjusted
Adjustments APF XV, Ltd. Adjustments Pro Forma
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $14,523,161 $ 804,208 $ 11,890 (j) $ 15,339,259
Fees................... (2,450,663)(b),(c) 1,256,304 0 (23,253)(k) 1,233,051
Interest and Other
Income................ 62,068 (d) 7,687,325 11,104 0 7,698,429
----------- ----------- --------- --------- -------------
Total Revenue.......... $(2,388,595) $23,466,790 $ 815,312 $ (11,363) $ 24,270,739
Expenses:
General and
Administrative
Expenses.............. (377,734)(e) 4,669,012 57,611 (26,638)(l),(m) 4,699,985
Management and Advisory
Fees.................. (1,308,560)(f) 0 8,051 (8,051)(n) 0
Fees Paid to Related
Parties............... (292,786)(g) 23,115 0 0 23,115
Interest Expense....... 0 4,819,998 0 0 4,819,998
State Taxes............ 0 235,208 21,191 7,614 (o) 264,013
Depreciation--Other.... 0 65,819 0 0 65,819
Depreciation--
Property.............. 0 1,898,278 74,838 14,696 (p) 1,987,812
Amortization........... 536,542 (h) 543,910 661 0 544,571
Transaction Costs...... 0 125,926 32,820 0 158,746
----------- ----------- --------- --------- -------------
Total Expenses......... (1,442,538) 12,381,266 195,172 (12,379) 12,564,059
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties and
Provision for Losses on
Properties............. $ (946,057) $11,085,524 $ 620,140 $ 1,016 $ 11,706,680
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 0 17,271 61,901 (3,225)(q) 75,947
Gain on Sale of
Properties............ 0 0 0 0 0
Provision For Loss on
Properties............ 0 (215,797) 0 0 (215,797)
----------- ----------- --------- --------- -------------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (946,057) 10,886,998 682,041 (2,209) 11,566,830
Benefit/(Provision) for
Federal Income Taxes.. (248,679)(i) 0 0 0 0
----------- ----------- --------- --------- -------------
Net Earnings (Losses)... $(1,194,736) $10,886,998 $ 682,041 $ (2,209) $ 11,566,830
=========== =========== ========= ========= =============
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.17 $ n/a $ 0.26
=========== =========== ========= ========= =============
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.84 $ n/a $ 16.39
=========== =========== ========= ========= =============
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.20 $ n/a $ n/a
=========== =========== ========= ========= =============
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.26x
=========== =========== ========= ========= =============
Wtd. Avg. Units
Outstanding............ n/a n/a 4,000,000 n/a n/a
=========== =========== ========= ========= =============
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,401 n/a 1,845,851 45,343,252(r)
=========== =========== ========= ========= =============
Shares Outstanding...... 6,150,000 43,498,464 n/a 1,845,851 45,344,315
=========== =========== ========= ========= =============
Calculation of Pro Forma
Distributions:
Pro Forma Cash from
Operations from
Statement of Cash
Flows................. $ (23,006,610)
Addback Pro Forma
Investments in Notes
Receivable............ 42,571,895
-------------
Adjusted Pro Forma
Distributions Declared: $ 19,565,285(s)
=============
Pro Forma Wtd. Avg.
Dollars Outstanding.... $906,865,032(t)
=============
Pro Forma Cash
Distributions Declared
per $10,000
Investment............. $ 216(u)
=============
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 $21,919,865(a) $55,049,526 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $21,919,865 $64,106,902 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 2,889,368(a) 6,931,658 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 2,889,368 12,298,325 11,435,228 7,966,916 25,677,829
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties and
Provision for Losses on
Properties ............ $32,778,080 $19,030,497 $51,808,577 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Other Expenses......... 0 0 0 0 0 0
Provision For Loss on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
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
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $19,030,497 $51,182,905 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Units
Outstanding............ n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,568,438 34,216,657 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 34,757 37,372,684 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Calculation of Pro Forma
Distributions Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows.............
Addback Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable......
Addback Pro Forma
Investments in Notes
Receivable............
Adjusted Pro Forma
Distributions Declared:
Pro Forma Wtd. Avg.
Dollars Outstanding....
Pro Forma Cash
Distributions Declared
per $10,000
Investment.............
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining Pro CNL Income
Forma Fund XV, Pro Forma Adjusted
Adjustments Combined APF Ltd. Adjustments Pro Forma
------------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $ 55,049,526 $ 3,171,668 $ 47,560 (j) $ 58,268,754
Fees................... (32,715,768)(b),(c) 3,226,263 0 (66,435)(k) 3,159,828
Interest and Other
Income................ 207,144 (d) 32,221,925 62,819 0 32,284,744
------------- ------------ ----------- --------- -------------
Total Revenue.......... $ (32,508,624) $ 90,497,714 $ 3,234,487 $ (18,875) $ 93,713,326
Expenses:
General and
Administrative........ (4,241,719)(e) 15,939,556 180,799 (73,333)(l),(m) 16,047,022
Management and Advisory
Fees.................. (4,658,434)(f) 0 33,990 (33,990)(n) 0
Fees to Related
Parties............... (2,161,897)(g) 858,787 0 0 858,787
Interest Expense....... 0 21,498,589 0 0 21,498,589
State Taxes............ 0 567,446 27,763 11,479 (o) 606,688
Depreciation--Other.... 0 199,157 0 0 199,157
Depreciation--
Property.............. (340,898)(r) 6,590,760 279,051 58,786 (p) 6,928,597
Amortization........... 2,146,168 (h) 2,310,169 2,837 0 2,313,006
Transaction Costs...... 0 157,054 23,196 0 180,250
------------- ------------ ----------- --------- -------------
Total Expenses......... (9,256,780) 48,121,518 547,636 (37,058) 48,632,096
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties and
Provision for
Losses on Properties... $ (23,251,844) $ 42,376,196 $ 2,686,851 $ 18,183 $ 45,081,230
Equity in Earnings of
Joint Venture/Minority
Interest.............. 0 (14,138) 236,553 (12,898)(q) 209,517
Gain on Sale of
Properties............ 0 0 0 0 0
Gain on
Securitization........ 0 3,694,351 0 0 3,694,351
Other Expenses......... 0 0 0 0 0
Provision For Loss on
Properties............ 0 (611,534) (280,907) 0 (892,441)
------------- ------------ ----------- --------- -------------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (23,251,844) 45,444,875 2,642,497 5,285 48,092,657
Benefit/(Provision) for
Federal Income Taxes.. 6,898,434 (i) 0 0 0 0
------------- ------------ ----------- --------- -------------
Net Earnings (Losses)... $ (16,353,410) $ 45,444,875 $ 2,642,497 $ 5,285 $ 48,092,658
============= ============ =========== ========= =============
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.66 $ n/a $ 1.14
============= ============ =========== ========= =============
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.87 $ n/a $ 16.44
============= ============ =========== ========= =============
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.80 $ n/a $ n/a
============= ============ =========== ========= =============
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.18
============= ============ =========== ========= =============
Wtd. Avg. Units
Outstanding............ n/a n/a 4,000,000 n/a n/a
============= ============ =========== ========= =============
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,366,657 n/a 1,845,851 42,212,508 (s)
============= ============ =========== ========= =============
Shares Outstanding...... 6,150,000 43,522,684 n/a 1,845,851 45,368,535
============= ============ =========== ========= =============
Calculation of Pro Forma
Distributions Declared:
Pro Forma Cash from
Operations from
Statement of
Cashflows............. $ 58,716,067
Addback Pro Forma Net
Cash Proceeds from
Securitization of
Notes Receivable...... (265,871,668)
Addback Pro Forma
Investments in Notes
Receivable............ 288,590,674
-------------
Adjusted Pro Forma
Distributions Declared: $ 81,435,073 (t)
=============
Pro Forma Wtd. Avg.
Dollars Outstanding.... $ 844,250,143 (u)
=============
Pro Forma Cash
Distributions Declared
per $10,000
Investment............. $ 965 (v)
=============
</TABLE>
F-27
<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 Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 10,490,297 $ 1,989,688 (a) $ 12,479,985 $ (195,278) $ (73,545) $ (129,428)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 1,548,813 349,465 (b) 1,898,278 39,581 0 0
Amortization expense... 7,368 0 7,368 0 26,238 424,697
Minority interest in
income of consolidated
joint venture......... 7,763 0 7,763 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 23,234 0 23,234 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 215,797 0 215,797 0 0 (73,166)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (82,660) 0 (82,660) (377,933) (242,251) (6,771)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (449,580)
Investment in notes
receivable............ 0 0 0 0 0 (42,571,895)
Collections on notes
receivable............ 0 0 0 0 0 6,417,907
Increase in restricted
cash.................. 0 0 0 0 0 (402,461)
Decrease in due from
related party......... 0 0 0 0 0 55,382
Decrease (increase) in
prepaid expenses...... 27,548 0 27,548 0 1,811 0
Decrease in net
investment in direct
financing leases...... 787,375 0 787,375 0 0 0
Increase in accrued
rental income......... (1,047,421) 0 (1,047,421) 0 0 0
Decrease (increase) in
intangibles and other
assets................ (30,554) 7,942
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 306,277 0 306,277 (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 0 71,853 25,550 0 0
Decrease in accrued
interest.............. 0 0 0 0 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 386,365 0 386,365 0 0 0
Increase (decrease) in
deferred rental
income................ 862,647 0 862,647 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Total adjustments...... 3,114,959 349,465 3,464,424 (1,183,414) (344,708) (37,064,802)
------------- ------------ ------------- ----------- --------- ------------
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)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 0 0 0 0
Additions to land and
buildings on operating
leases................ (77,028,830) (58,749,637)(e) (135,778,467) (31,577) (10,092) 0
Investment in direct
financing leases...... (29,608,346) 0 (29,608,346) 0 0 0
Investment in joint
venture............... (117,662) 0 (117,662) 0 0 0
Acquisition of
businesses............
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 134,981
Investment in mortgage
notes receivable...... (1,388,463) 0 (1,388,463) 0 0 0
Collections on mortgage
note receivable....... 75,010 0 75,010 0 0 0
Investment in notes
receivable............ (1,087,483) 0 (1,087,483) 0 0 0
Collection on notes
receivable............ 239,596 0 239,596 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... 0 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) investing
activities............ (108,916,178) (58,749,637) (167,665,815) (31,577) (10,092) 134,981
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,735 0 210,735 1,288,673 20,572 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,142,237) 0 (1,142,237) 0 0 0
Payment of stock
issuance costs........ (722,001) 0 (722,001) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 36,587,245 33,656,518 (e) 70,243,763 0 0 49,730,934
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (2,385) (10,291,473)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (8,610) 0 (8,610) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0 0
Distributions to
stockholders.......... (14,237,405) 0 (14,237,405) 0 0 0
Other.................. (200,234) 0 (200,234) 0 0 (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
Cash at beginning of
year................... 123,199,837 0 123,199,837 713,308 962,573 2,526,078
------------- ------------ ------------- ----------- --------- ------------
Cash at end of year..... $ 35,796,119 $(22,753,966) $ 13,042,153 $ 591,712 $ 552,415 $ 4,896,688
============= ============ ============= =========== ========= ============
</TABLE>
F-28
<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>
Historical
Combining CNL
Pro Forma Income Fund Pro Forma Adjusted
Adjustments Combined APF XV, Ltd. Adjustments Pro Forma
----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(1,194,736)(a) $ 10,886,998 $ 682,041 $ (2,209)(a) $ 11,566,830
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 0 1,937,859 74,838 14,696 (b) 2,027,393
Amortization expense... 536,542 (c) 994,845 661 0 995,506
Minority interest in
income of consolidated
joint venture......... 0 7,763 0 0 7,763
Equity in earnings of
joint ventures, net of
distributions......... 0 23,234 (3,241) 3,225 (d) 23,218
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 0 142,631 0 0 142,631
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (709,615) 23,662 0 (685,953)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (449,580) 0 0 (449,580)
Investment in notes
receivable............ 0 (42,571,895) 0 0 (42,571,895)
Collections on notes
receivable............ 0 6,417,907 0 0 6,417,907
Increase in restricted
cash.................. 0 (402,461) 0 0 (402,461)
Decrease in due from
related party......... 0 55,382 0 0 55,382
Decrease (increase) in
prepaid expenses...... 0 29,359 (8,832) 0 20,527
Decrease in net
investment in direct
financing leases...... 0 787,375 20,462 0 807,837
Increase in accrued
rental income......... 0 (1,047,421) (90,416) 0 (1,137,837)
Decrease (increase) in
intangibles and other
assets................ 0 (22,612) 0 0 (22,612)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (768,267) 36,142 0 (732,125)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 97,403 (12,776) 0 84,627
Decrease in accrued
interest.............. 0 (362,877) 0 0 (362,877)
Increase in rents paid
in advance and
deposits.............. 0 386,365 (39,902) 0 346,463
Increase (decrease) in
deferred rental
income................ 0 862,647 0 0 862,647
----------- ------------- ---------- ----------- -------------
Total adjustments...... 536,542 (34,591,958) 598 17,921 (34,573,439)
----------- ------------- ---------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (658,194) (23,704,960) 682,639 15,712 (23,006,609)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 0 0 0 0
Additions to land and
buildings on operating
leases................ (135,820,136) 0 (135,820,136)
Investment in direct
financing leases...... 0 (29,608,346) 0 0 (29,608,346)
Investment in joint
venture............... 0 (117,662) 0 0 (117,662)
Acquisition of
businesses............ (8,210,535)(f) (8,210,535) (2,492,465)(g) (11,125,000)
(422,000)(g)
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 134,981 0 0 134,981
Investment in mortgage
notes receivable...... 0 (1,388,463) 0 0 (1,388,463)
Collections on mortgage
note receivable....... 0 75,010 0 0 75,010
Investment in notes
receivable............ 0 (1,087,483) 0 0 (1,087,483)
Collection on notes
receivable............ 0 239,596 0 0 239,596
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 0 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 0 0 0
----------- ------------- ---------- ----------- -------------
Net cash provided by
(used in) investing
activities............ (8,210,535) (175,783,038) 0 (2,914,465) (178,697,503)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 1,519,980 0 0 1,519,980
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,142,237) 0 0 (1,142,237)
Payment of stock
issuance costs........ 0 (722,001) 0 0 (722,001)
Proceeds from borrowing
on line of
credit/notes payable.. 0 119,974,697 0 0 119,974,697
Payment on line of
credit/notes payable.. 0 (22,874,147) 0 0 (22,874,147)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (8,610) 0 0 (8,610)
Distributions to
limited partners...... 0 0 (800,000) 0 (800,000)
Distributions to
stockholders.......... 0 (14,237,405) 0 0 (14,237,405)
Other.................. 0 (209,836) 0 0 (209,836)
----------- ------------- ---------- ----------- -------------
Net cash provided by
(used in) financing
activities............ 0 82,300,441 (800,000) 0 81,500,441
Net increase in cash.... (8,868,729) (117,187,557) (117,361) (2,898,753) (120,203,671)
Cash at beginning of
year.................... 0 127,401,796 1,214,444 0 128,616,240
----------- ------------- ---------- ----------- -------------
Cash at end of year..... $(8,868,729) $ 10,214,239 $1,097,083 $(2,898,753) $ 8,412,569
=========== ============= ========== =========== =============
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income(loss)........ $ 32,152,408 $ 19,030,497 (a) $ 51,182,905 $10,656,379 $ (468,133) $ 427,134
Adjustments to reconcile
net income(loss) to net
cash provided by (used
in) operating
activities:
Depreciation........... 4,042,290 2,889,368 (b) 6,931,658 119,923 79,234 0
Amortization expense... 11,808 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
leases................ 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) (2,187,652) 0 0 0
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 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 693,372 0 0 0
------------- ------------ ------------- ----------- ---------- -------------
Total adjustments...... 6,963,867 2,889,368 9,853,235 (3,608,563) 316,963 1,610,591
------------- ------------ ------------- ----------- ---------- -------------
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
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (58,749,637)(e) (258,851,304) (381,671) (236,372) 0
Investment in direct
financing leases...... (47,115,435) (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) (974,696) 0 0 0
Acquisition of
businesses
Purchase of other
investments........... (16,083,055) (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) (6,281,069) 0 0 0
0 0 0 0 0
Other.................. 0 0 200,000 0 0
------------- ------------ ------------- ----------- ---------- -------------
Net cash provided
by(used in) investing
activities............ (277,338,756) (58,749,637) (336,088,393) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0
0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 (A) 33,656,518 (e) 41,348,558 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) (34,073) 0 0 0
Distributions to
limited partners...... 0 0 0 0 0
Distributions to
stockholders.......... (39,449,149) (39,449,149) (9,364,488) 0 0
Other.................. (95,101) (95,101) 0 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
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
============= ============ ============= =========== ========== =============
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL Income
Pro Forma Combined Fund XV, Pro Forma Adjusted
Adjustments APF Ltd. Adjustments Pro Forma
------------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income(loss)........ $ (16,353,410)(a) $ 45,444,875 $ 2,642,497 $ 5,285 (a) $ 48,092,657
Adjustments to reconcile
net income(loss) to net
cash provided by(used
in) operating
activities:
Depreciation........... (340,898)(b) 6,789,917 279,051 58,786 (b) 7,127,754
Amortization expense... 2,146,168 (c) 4,460,252 2,837 4,463,089
Minority interest in
income of consolidated
joint venture......... 30,156 -- 0 30,156
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 34,522 12,898 (d) 31,980
Loss(gain) on sale of
land, building, net
investment in direct
leases................ 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 1,009,576 280,907 1,290,483
Gain on
securitization........ (3,356,538) 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 265,871,668 0 265,871,668
Decrease(increase) in
other receivables..... (2,543,413) (33,427) (2,576,840)
Increase in accrued
interest income
included in notes
receivable............ (170,492) 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0
Investment in notes
receivable............ (288,590,674) 0 (288,590,674)
Collections on notes
receivable............ 23,539,641 0 23,539,641
Decrease in restricted
cash.................. 2,504,091 0 2,504,091
Decrease(increase) in
due from related
party................. (953,688) 0 (953,688)
Increase in prepaid
expenses.............. 7,246 (1,994) 5,252
Decrease in net
investment in direct
financing leases...... 1,971,634 85,884 2,057,518
Increase in accrued
rental income......... (2,187,652) (142,233) (2,329,885)
Increase in intangibles
and other assets...... (154,351) 0 (154,351)
Increase(decrease) in
accounts payable,
accrued expenses and
other
liabilities........... 846,680 3,462 850,142
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. (133,364) 16,876 (116,488)
Increase in accrued
interest.............. (77,968) 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 48,346 485,189
Decrease in deferred
rental income......... 693,372 0 693,372
------------- ------------- ----------- ------------ ------------
Total adjustments...... 1,805,270 9,977,496 574,231 71,684 10,623,411
------------- ------------- ----------- ------------ ------------
Net cash provided
by(used in) operating
activities............ (14,548,140) 55,422,371 3,216,728 76,969 58,716,068
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 0 2,385,941
Additions to land and
buildings on operating
leases................ (259,469,347) 0 (259,469,347)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435)
Investment in joint
venture............... (974,696) (216,992) (1,191,688)
Acquisition of
businesses............ (8,210,535)(f) (8,210,535) (2,492,465)(g) (11,125,000)
(422,000)(g)
Purchase of other
investments........... (16,083,055) 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 295,514 0 295,514
Proceeds from retained
interest and
securities, excluding
investment
income................ 212,821 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648)
Collections on mortgage
note receivable....... 291,990 0 291,990
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750)
Collections on
equipment notes
receivable............ 3,046,873 0 3,046,873
Decrease in restricted
cash.................. 0 0 0
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069)
0 0 0
Other.................. 200,000 0 200,000
------------- ------------- ----------- ------------ ------------
Net cash provided
by(used in) investing
activities............ (8,210,535) (342,425,396) (216,992) (2,914,465) (345,556,853)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 386,592,011 0 386,592,011
Contributions from
limited partners...... 0 0 0
0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925)
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 455,102,478 0 455,102,478
Payment on line of
credit/notes payable.. (411,813,826) 0 (411,813,826)
Retirement of shares of
common stock.......... (639,528) 0 (639,528)
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073)
Distributions to
limited partners...... 0 (3,400,000) (3,400,000)
Distributions to
stockholders.......... (48,813,637) 0 (48,813,637)
Other.................. (2,595,088) 0 (2,595,088)
------------- ------------- ----------- ------------ ------------
Net cash provided
by(used in) financing
activities............ 0 338,643,762 (3,400,000) 0 335,243,762
Net increase(decrease)
in cash................ (22,758,675) 51,640,737 (400,264) (2,837,496) 48,402,977
Cash at beginning of
year................... 49,829,130 1,614,708 51,443,838
------------- ------------- ----------- ------------ ------------
Cash at end of year..... $ (22,758,675) $ 101,469,867 $ 1,214,444 $ (2,837,496) $ 99,846,815
============= ============= =========== ============ ============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of 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 Income Fund. This unaudited pro forma financial
information has been prepared utilizing the historical financial statements of
APF and the historical combined financial information of the Advisor, CNL
Restaurant Financial Services Group and the Income Fund and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, the Advisor the CNL Restaurant Financial Services Group and the Income
Fund. The Pro Forma Balance Sheet was prepared as if the transactions described
above occurred on 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 Fund 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 Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
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
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
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.
(B) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Shares Offered............. 3,800,000 2,350,000 1,845,850.6 7,995,850.6
Exchange Value............. $ 20 $ 20 $ 20 $ 20
----------- ----------- ----------- ------------
Share Consideration........ $76,000,000 $47,000,000 $36,917,012 $159,917,012
Cash Consideration......... -- -- 422,000 422,000
APF Transaction Costs...... 5,073,176 3,137,359 2,492,465 10,703,000
----------- ----------- ----------- ------------
Total Purchase Price... $81,073,176 $50,137,359 $39,831,477 $171,042,012
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets--Historical..... $ 7,141,252 $10,006,878 $35,347,941 $ 52,496,071
Purchase Price Adjustments:
Land and buildings on
operating leases........ 4,299,947 4,299,947
Net investment in direct
financing leases........ 1,097,122 1,097,122
Investment in joint
ventures................ 760,356 760,356
Accrued rental income.... (1,655,430) (1,655,430)
Intangibles and other
assets.................. (2,792,876) (18,459) (2,811,335)
Goodwill*................ 42,923,357 -- 42,923,357
Excess purchase price.... 73,931,924 -- -- 73,931,924
----------- ----------- ----------- ------------
Total Allocation....... $81,073,176 $50,137,359 $39,831,477 $171,042,012
=========== =========== =========== ============
</TABLE>
- --------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $10,703,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,931,924 was
expensed at March 31, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations". Goodwill of 42,923,357 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 Earn-
ings.......... 3,277,060
Accumulated
distributions
in excess of
earnings...... 73,931,924
Goodwill for
CFC (Intangi-
bles and other
assets)....... 42,923,357
CFC/CFS Org
Costs/Other
Assets...... 2,792,876
Cash to pay
APF transac-
tion costs.. 8,210,535
APF Common
Stock....... 61,500
APF APIC..... 122,938,500
(To record ac-
quisition of
CFA, CFS and
CFC)
2.Partners Capi-
tal............. 35,347,941
Land and build-
ings on oper-
ating leases.. 4,299,947
Net investment
in direct fi-
nancing
leases........ 1,097,122
Investment in
joint ven-
tures......... 760,356
Accrued
rental in-
come........ 1,655,430
Intangibles
and other
assets...... 18,459
Cash to pay
APF Transac-
tion costs.. 2,492,465
Cash consid-
eration to
Income
Fund........ 422,000
APF Common
Stock....... 18,459
APF APIC..... 36,898,553
(To record ac-
quisition of
Income Fund)
</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 Income Fund of $10,561 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, 1999.
(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
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
adjustments were made for any properties for the periods prior to
their construction completion and availability for occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates......................... $ (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 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
</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>
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $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)
<TABLE>
<S> <C>
Amortization of goodwill..................................... $536,542
</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 $11,890 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................. $ (8,051)
Reimbursement of administrative costs....................... (15,202)
--------
$(23,253)
========
</TABLE>
(l) Represents the elimination of $15,202 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $11,436 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 $8,051 in management fees by the
Income Fund to the Advisor.
(o) Represents additional state income taxes of $7,614 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through May 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 Fund 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 $14,696 as a
result of adjusting the historical basis of the real estate wholly
owned by the Income Fund to fair value as a result of accounting
for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings is
being depreciated using the straight-line method over the remaining
useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $3,225 as a result of adjusting the historical basis of the real
estate owned by the Income Fund, indirectly through joint venture
or tenancy in common arrangements, to fair value as a result of
accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 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.
(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
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................ $ (1,773,406)
Secured equipment lease fees............................ (54,998)
Advisory fees........................................... (305,030)
Reimbursement of administrative costs................... (408,762)
Acquisition fees........................................ (21,794,386)
Underwriting fees....................................... (388,491)
Administrative, executive and guarantee fees............ (1,233,043)
Servicing fees.......................................... (1,570,331)
Development fees........................................ (229,153)
Management fees......................................... (1,851,004)
------------
Total................................................. $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31,
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
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................................... $2,146,168
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to qualify
as a REIT and does not expect to incur federal income taxes.
(j) Represents $47,560 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................. $(33,990)
Reimbursement of administrative costs....................... (32,445)
--------
$(66,435)
========
</TABLE>
(l) Represents the elimination of $32,445 in administrative costs
reimbursed by the Income Fund to the Advisor.
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(m) Represents savings of $40,888 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 $33,990 in management fees by the
Income Fund to the Advisor.
(o) Represents additional state income taxes of $11,479 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 Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
(p) Represents an increase in depreciation expense of $58,786 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Fund through joint venture or tenancy in common
arrangements with affiliates or unrelated third parties, to fair
value as a result by the Income Fund to fair value as a result of
accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $12,898 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF
and the Advisor which on a historical basis were capitalized as
part of the basis of the building.
(s) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a reverse stock split proposal and a
proposal to increase the number of authorized common shares of APF
on January 1, 1998.
(t) 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 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.
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non-Cash Investing Activities
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B)
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the use of amounts borrowed under APF's credit facility
and the use of cash to 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 Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
Non Cash Investing Activities:
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
F-40
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund XV, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund XV, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
A-1
<PAGE>
(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
A-2
<PAGE>
Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
A-3
<PAGE>
Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among CNL American Properties Fund, Inc., a
Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware limited
partnership (the "Operating Partnership"), CNL APF GP corp., a Delaware
corporation (the "OP General Partner"), CNL Income Fund XV, Ltd., a Florida
limited partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr.,
and CNL Realty Corporation, a Florida corporation (together with Messrs. Borne
and Seneff, the "General Partners"). APF, the Operating Partnership, the OP
General Partner, the Fund and the General Partners are referred to collectively
herein as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund will
be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. AMENDMENTS TO MERGER AGREEMENT
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its
entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred
by the Fund but paid or assumed by APF on behalf of the Fund (or, if
APF consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote
against the Merger and affirmatively elect the note option, such
limited partners shall be entitled to receive, in lieu of the Share
Consideration, notes (the "Notes") in the aggregate amount equal to 97%
of the value (based on the Exchange Value as defined in the
Registration Statement) of the Share Consideration such Dissenting
Partners would have otherwise received had such partners not elected to
receive the Notes (the "Note Option"). The Notes will mature on the
fifth anniversary of the Closing Date and will bear interest at a fixed
rate equal to seven percent. The aggregate Share Consideration shall be
reduced on a one-for-basis for all APF Shares otherwise distributable
to Dissenting Partners had such Dissenting Partners not elected the
Note Option."
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to
Dissenting Limited Partners shall not have exceeded 15% of the value of
the Share Consideration based on the Exchange Value."
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1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. GENERAL
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will
constitute one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of
Florida or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Florida.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
By: /s/ James M. Seneff, Jr.
Its: Chairman and 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 XV, 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
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund XV, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
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"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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<PAGE>
"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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<PAGE>
(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 3,733,901 fully paid and nonassessable APF Common
Shares (1,866,951 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $33,159,327,based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 57,266,099 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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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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<PAGE>
APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 4,000,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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<PAGE>
will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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<PAGE>
(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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<PAGE>
from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $3,733,901 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $373,390 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
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 XV, 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
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Appendix C
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF LIMITED PARTNERSHIP
OF
CNL Income Fund XV, Ltd
- --------------------------------------------------------------------------------
(Insert name currently on file with Florida Dept. of State)
Pursuant to the provisions of section 620,109, Florida Statutes, this
Florida limited partnership, whose certificate was filed with the Florida
Department of State on September 2, 1993, adopts the following certificate of
amendment to its certificate of limited partnership:
FIRST: Amendment(s): (indicate article number(s) being amended, added, or
deleted)
Article XX, Section 21.5 is deleted in its entirety, and all cross
references to such section are deleted in their entirety.
SECOND: This certificate of amendment shall be effective at the time of its
filing with the Florida Department of State.
THIRD: Signature(s)
Signature of current general partner(s):
_____________________________________
James M. Seneff, Jr.
_____________________________________
Robert A. Bourne
CNL Realty Corporation
By:
___________________________________
Name:
Signature(s) of new general partner(s), if applicable: N/A
C-1
<PAGE>
Appendix D
[FORM OF OPINION]
, 1999
James M. Seneff, Jr.
Robert A. Bourne
400 East South Street
Orlando, Florida 32801
Gentlemen:
We have acted as counsel to CNL Income Fund XV, Ltd., a Florida limited
partnership (the "Partnership") of which you are the general partners (the
"General Partners"), in connection with the proposed amendment (the "Proposed
Amendment") to the Amended and Restated Agreement of Limited Partnership of CNL
Income Fund XV, Ltd. (the "Partnership Agreement"). The Partnership Agreement
requires that in connection with any proposed amendment to the Partnership
Agreement (other than ministerial amendments and those amendments dealing with
the transfer of a limited partner's partnership interest or the admission of
substituted or additional limited partners), the General Partners must obtain
an opinion of counsel concerning whether such proposed amendment would result
in changing the Partnership to a general partnership. The Proposed Amendment
would delete the provision in the Partnership Agreement that prohibits the
Partnership from participating in any transaction involving (i) the
acquisition, merger, conversion, or consolidation, either directly or
indirectly, of the Partnership, and (ii) the issuance of securities of any
other partnership, real estate investment trust, corporation trust or other
entity that would be created or would survive after the successful completion
of such transaction.
This opinion is furnished pursuant to the Partnership Agreement. In
rendering our opinion, we have examined and relied on the Partnership
Agreement, the Proposed Amendment, and the Certificate of Limited Partnership
of the Partnership. We have, in addition, made such other inquiries of fact and
examinations of law as we have deemed necessary for purposes of rendering this
opinion.
We are members of the Bar of the State of Florida and do not hold ourselves
out as being conversant with the laws of any jurisdiction other than those of
the State of Florida and are expressing no opinion as to the laws of any
jurisdiction other than those of the State of Florida and our opinion is so
limited.
In rendering the opinion set forth below, we have assumed: the genuineness
of all signatures on records, certificates, instruments, agreements and other
documents submitted to us for examination; the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, photostatic, facsimile, reproduced, or
conformed copies and the authenticity of the originals of such latter
documents; the accuracy and completeness of all factual representations made in
the above-referenced documents; and the legal capacity of all natural persons.
Based upon the foregoing and subject to the limitations and qualifications
hereinafter set forth, we are of the opinion that the Proposed Amendment to the
Partnership Agreement would not result in changing the Partnership to a general
partnership.
This opinion letter is based upon and limited to laws of the State of
Florida as in effect on the date of this letter and to our current knowledge of
facts in existence as of the date of this letter and material to the opinions
expressed in this letter. This opinion letter is rendered as of the date
hereof, and does not purport to analyze, evaluate or consider the legal effect
of any event, legal or factual, occurring after such date that may alter the
validity, effect or contents of this opinion, and we assume no obligation to
update the opinion set forth herein.
<PAGE>
This opinion letter is limited to the matters expressly set forth in this
letter, and no other statement or opinions should be inferred beyond the
matters expressly stated.
Except as agreed by us in writing, our opinion is solely for the benefit of
the addressees shown on the first page hereof and the limited partners of the
Partnership and may be relied upon by such parties solely for the purposes for
which it is being furnished. Without our prior written consent, this opinion
letter may not be used, circulated, quoted or otherwise referred to for any
purpose except as stated herein.
Very truly yours,
Baker & Hostetler LLP
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND XVI, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund XVI, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly-owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999, and effective
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds) that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
What is APF?
APF is a full-service estate investment trust, formed in 1994, whose primary
business is the ownership of restaurant properties leased to operators of
national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties on a triple-net
basis, APF has the ability to offer a complete range of restaurant property
services to operators of national and regional restaurant chains, from triple-
net leasing and mortgage financing to site selection, construction management
and build-to-suit development. If APF acquires all of the Income Funds in the
Acquisition, APF expects to have total assets of approximately $1.5 billion at
the time of the consummation of the Acquisition and will be one of the largest
triple-net lease REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 2,160,474 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is uncertain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for
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trading on the NYSE. We do not know the value at which an APF Share will trade
on the NYSE upon listing. It is possible that the APF Shares will trade at
prices substantially below the exchange value. APF has, however, recently sold
$750 million of APF Shares through three public offerings. In each offering,
the offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At March 31, 1999, APF has invested all of the net offering proceeds to acquire
restaurant properties, to make mortgage loans and to pay fees and other
expenses.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the Acquisition?
There are a number of material risks and considerations that you should
consider, including:
.We are uncertain as to the value at which APF Shares will trade following
listing.
.we have material conflicts in light of our being both general partners of
the Income Funds and members of APF's Board of Directors.
.unlike your Income Fund, APF will not be prohibited from incurring
indebtedness,
.as stated below, the Acquisition is a taxable transaction.
.the Acquisition involves a fundamental change in your investment.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote against the
Acquisition.
Did you receive a fairness opinion in connection with APF's acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
with respect to the fairness, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the colored
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's acquisition of your
Income Fund. If you prefer, you may instead vote by telephone, following the
instructions on your consent form. If you sign and send in your consent form
and do not indicate how you want to vote, your consent form will be counted as
a vote "For" the Acquisition. If you do not vote or you abstain from voting, it
will count as a vote "Against" the Acquisition.
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In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the Form of 7.0% callable notes due ,
2004 in an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only receive the notes if you vote "Against" the
Acquisition, and you elect to receive notes on your consent form. You will
receive APF Shares if your Income Fund elects to be acquired in the Acquisition
and you vote "For" the Acquisition, or you vote "Against" the Acquisition and
do not affirmatively select the notes option on your consent form. In addition,
if Limited Partners in your Income Fund elect to receive notes in an amount
greater than 15% of the estimated value of APF Shares, based on the exchange
value, to be paid to your Income Fund, then APF has the right to decline to
acquire your Income Fund. The notes will not be listed on any exchange or
automated quotation system, and a market for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are a person
subject to income taxation or a tax-paying entity and you receive APF Shares,
the tax that you must pay will generally be based on the difference between the
value of the APF Shares you receive and the tax basis of your units. If you
elect the notes, your tax will be based upon your allocable share of the gain
which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Some of
the gain may be subject to the 25% rate of tax applicable to certain types of
real property gain.
We urge you to consult with your tax advisor to evaluate the taxes that will
be incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $50. To review
the tax consequences to the Limited Partners of the Income Funds in greater
detail, see pages 180 through 194 of the consent solicitation and "Federal
Income Tax Considerations" in this supplement.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds acquired by
APF may be differently constructed, located in a different geographic area or
of a different restaurant chain than the restaurant properties owned by your
Income Fund. Because the market for real estate may vary from one region of the
country to another, the change in geographic diversity may expose you to
different and greater risks than those to which you are presently exposed. For
geographic information regarding APF's and the Income Funds' restaurant
properties, see "APF's Business and The Restaurant Properties--Business
Objectives and Strategies" and "--The Restaurant Properties--General" and
"Business of the Income Funds--Description of Restaurant Properties" in the
consent solicitation.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund. This description is qualified in its entirety
by the more detailed discussion in the section entitled "Risk Factors"
contained in the consent solicitation.
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Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease below the exchange value upon listing.
Your Income Fund will be receiving 2,160,474 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices substantially below
the Exchange Value or the historical per share book value of the assets of APF.
The APF Shares have been approved for listing on the NYSE, subject to official
notice of issuance. Prior to listing, the existing APF stockholders have not
had an active trading market in which they could sell their APF Shares.
Additionally, any Limited Partners of the Income Funds who become APF
stockholders as a result of the Acquisition, will have transformed their
investment in non-tradable units into an investment in freely tradable APF
Shares. Consequently, some of these stockholders may choose to sell their APF
Shares upon listing at a time when demand for APF Shares may be relatively low.
The market price of the APF Shares may be volatile after the Acquisition, and
the APF Shares could trade at prices substantially less than the exchange value
as a result of increased selling activity following the issuance of the APF
Shares, the interest level of investors in purchasing the APF Shares after the
Acquisition and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund made $788, $820 and $800, respectively, in distributions per $10,000
investment to you. While historically, APF has made distributions equal to
7.625% per APF Share, based on the exchange value, we cannot be sure that APF
will be able to maintain this level of distributions in the future. In the
event that APF is unable to maintain this level of distributions in the future,
your distributions per $10,000 investment may decrease substantially after the
Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have two material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne, have a different interest in the completion of the Acquisition
which may conflict with your interest as a Limited Partner of the Income Fund
or with their own positions as the general partners of your Income Fund.
Second, while we will not receive any APF Shares as a result of APF's
Acquisition of your Income Fund, we, as the general partners of your Income
Fund, may be required to pay all or a substantial portion of the Acquisition
costs allocated to your Income Fund to the extent that you or other Limited
Partners of your Income Fund vote against the Acquisition. For additional
information regarding the Acquisition costs allocated to your Income Fund, see
"Comparison of Alternative Effect on Financial Condition and Results of
Operations" contained in this supplement.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own and lease on a triple net basis, on the date that the Acquisition
is consummated, assuming only your Income Fund was acquired as of March 31,
1999, 557 restaurant properties. The risks inherent in investing in an
operating company such as APF include that APF
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may invest in new restaurant properties that are not as profitable as APF
anticipated, may incur substantial indebtedness to make future acquisitions of
restaurant properties which it may be unable to repay and may make mortgage
loans to prospective operators of national and regional restaurant chains which
may not have the ability to repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through sale of your APF Shares, not from
liquidation proceeds from restaurant properties. Continuation of your Income
Fund would, on the other hand, permit you eventually to receive liquidation
proceeds, if any, from the sale of the Income Fund's restaurant properties, and
your share of these sale proceeds could be higher than the amount realized from
the sale of your APF Shares or from the combination of cash paid to and
payments on any notes if you elect to receive the notes.
You may not receive the potential appreciation of your Income Fund's restaurant
property portfolio if your Income Fund is acquired.
Your Income Fund's partnership agreement provides that unless earlier
terminated pursuant to its terms, your Income Fund will be terminated,
dissolved, and its assets liquidated on December 31, 2031. At the time of your
Income Fund's formation, we contemplated that its investment program would
terminate and its investments would be liquidated some time between 2002 and
2007. If your Income Fund is acquired by APF in the Acquisition, your Income
Fund will be liquidated prior to the originally contemplated timeframe. Due to
the lack of certainty with respect to the potential appreciation of APF Shares,
an investment in APF Shares may not outperform the potential appreciation of
your investment in your Income Fund if your Income Fund had remained in
existence at least until the contemplated liquidation date.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default 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. APF now operates these lending and securitization operations. APF
's experience with direct oversight of such mortgage financing is limited, and
we cannot be sure that APF will be able to integrate successfully the lending
and securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize,
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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 report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to Fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
March 31, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.62x and its ratio of debt-to-total assets was
28.01%. If only your Income Fund were acquired as of that date, APF's debt
service ratio would have been 3.79x and its ratio of debt-to-total assets would
have been 26.90%. Up through the time immediately prior to the consummation of
the Acquisition, as a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former limited partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant
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property is in a market in which APF has not invested before, APF will have
relatively little experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgages. APF
typically does not require that a third party guarantee the obligations of the
tenant or the borrower. The ability of the tenants or borrowers to pay their
obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to: (1)
national, regional and local economic conditions which may be adversely
affected by industry slowdowns, employer relocations, prevailing employment
conditions and other factors, and which may reduce consumer demand for the
products offered by APF's customers; (2) local real estate conditions; (3)
changes or weaknesses in specific industry segments; (4) perceptions by
prospective customers of the safety, convenience, services and attractiveness
of the restaurant chain; (5) changes in demographics, consumer tastes and
traffic patterns; (6) the ability to obtain and retain capable management; (7)
changes in laws, building codes, similar ordinances and other legal
requirements, including laws increasing the potential liability for
environmental conditions existing on properties; (8) the inability of a
particular restaurant chain's computer system, or that of its franchisor or
vendors, to adequately address Year 2000 issues; (9) increases in operating
expenses; and (10) increases in minimum wages, taxes including income, service,
real estate and other taxes or mandatory employee benefits.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as a stockholder, would be reduced substantially for
each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to certain adjustments that are unique to REITs, a REIT generally
must distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
For a more detailed discussion of the risks associated with the Acquisition,
see "Risk Factors" in the consent solicitation.
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CONSIDERATION PAID TO INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners or each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth information regarding the estimated value of
the consideration that your Income Fund will receive in the Acquisition. The
APF Shares payable to your Income Fund will not change if APF acquires fewer
than all of the Income Funds in the Acquisition. This data assumes that none of
the Limited Partners of your Income Fund have elected to receive notes. You
should note that the APF Shares may trade at prices substantially below the
exchange value upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited
Original Partner
Limited Investments
Partner Less Any Estimated Value of
Investments Distributions of Estimated APF Shares per
Less Any Net Sales Number of Value of APF Estimated Value Average $10,000
Distributions Proceeds per APF Shares Shares Estimated of APF Shares Original Limited
of Net Sales $10,000 Original Offered to Payable to Acquisition after Acquisition Partner
Proceeds(1) Investment(1) Income Fund Income Fund Expenses Expenses Investment
- ------------- ---------------- ----------- ------------ ----------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
$45,000,000 $10,000 2,160,474 $43,209,480 $473,000 $42,736,480 $9,497
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2004. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2004. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest. For more detailed information, see "The Acquisition" and
"Description of the Notes" in the consent solicitation.
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
S-8
<PAGE>
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees (1)................................................... $ 25,002
Appraisals and Valuation (2)..................................... 7,260
Fairness Opinions (3)............................................ 30,000
Solicitation Fees (4)............................................ 16,499
Printing and Mailing (5)......................................... 107,770
Accounting and Other Fees (6).................................... 59,399
--------
Subtotal .................................................... $245,930
Closing Transaction Costs
Title, Transfer Tax and Recording Fees (7)....................... 104,185
Legal Closing Fees (8)........................................... 51,461
Partnership Liquidation Costs (9)................................ 71,424
--------
Subtotal .................................................... 227,070
--------
Total ........................................................... $473,000
========
</TABLE>
--------
(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $312,063. Your
Income Fund's pro-rata portion of these fees was determined based
on the percentage of the value of the APF Share consideration
payable to your Income Fund, based on the exchange value, to the
total value of the APF Share consideration payable to all of the
Income Funds, based on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the
Income Funds in connection with the Acquisition were $105,420. Your
Income Fund's pro-rata portion of these fees was determined based
on number of restaurant properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and
incurred a fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $249,626. Your
Income Fund's pro-rata portion of these fees was determined based
on the number of Limited Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to be
$1,610,399. Your Income Fund's pro-rata portion of these fees was
determined based on the number of Limited Partners in your Income
Fund.
(6) Aggregate accounting and other fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to be
$683,904. Your Income Fund's pro-rata portion of these fees was
determined based on the percentage of your Income Fund's total
assets as of March 31, 1999 to the total assets of all of the
Income Funds as of March 31, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by
all of the Income Funds in connection with the Acquisition is
estimated to be $1,312,808. Your Income Fund's pro-rata portion of
these fees was determined based on the percentage of the value of
the APF Share consideration payable to your Income Fund, based on
the exchange value, to the total value of the APF Share
consideration payable to all of the Income Funds, based on the
exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,454. Your
Income Fund's pro-rata portion of these fees was determined based
on the percentage of your Income Fund's total assets as of March
31, 1999 to the total assets of all of the Income Funds as of March
31, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of
the Income Funds in connection with the Acquisition is estimated to
be $895,326. Your Income Fund's pro-rata portion of these costs was
determined based on the percentage of the value of the APF Share
consideration payable to your Income Fund, based on the exchange
value, to the total value of the APF Share consideration payable to
all of the Income Funds, based on the exchange value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer fact Sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
S-9
<PAGE>
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 80% or more in value of the Income Fund's
restaurant properties acquired within two years of the initial date of the
prospectus (September 1994). Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding units.
Required Amendment to the Partnership Agreement
Your Income Fund's partnership agreement includes one provision that may
prevent the successful completion of APF's Acquisition of your Income Fund.
This provision must be amended in order to successfully complete the
Acquisition. Therefore, if you vote "For" the Acquisition, you will also be
asked to vote in favor of this amendment. The proposed amendment is summarized
below:
. Amendment to Roll-Up Prohibition. Article 21 of the partnership
agreement currently provides that your Income Fund may not participate
in any transaction involving (i) the acquisition, merger, conversion or
consolidation, either directly or indirectly, of your Income Fund, and
(ii) the issuance of securities of any other partnership, real estate
investment trust, corporation, trust or other entity that would be
created or would survive after the successful completion of such
transaction.
If the Limited Partners holding a majority of the units approve this
amendment to your Income Fund's partnership agreement your Income Fund, Article
21 will be deleted in its entirety.
Partnership Agreement Amendment Procedures
Pursuant to Article 13 of your Income Fund's partnership agreement, we may
propose amendments to the partnership agreement. Article 13 of the partnership
agreement requires that we furnish you with a verbatim statement of the
proposed amendment, which is attached to this supplement as Appendix C, and to
include an opinion of our counsel regarding whether the proposed amendment
would result in changing your Income Fund to a general partnership, changing
our liability or your liability, or allowing you to take part in the control or
management of your Income Fund. The form of opinion of Baker & Hostetler LLP is
attached to this supplement as Appendix D.
Consequence of Failure to Approve the Acquisition or the Amendments
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition and the proposed
amendment to the partnership agreement, the Acquisition may not be consummated
under the terms of the partnership agreement. In such event, we plan to
continue to operate your Income Fund as a going concern and to eventually
dispose of your Income Fund's restaurant properties approximately 7 to 12 years
after they were acquired, or as soon thereafter if, in our opinion, market
conditions permit, as contemplated by the terms of the partnership agreement.
S-10
<PAGE>
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at
. We and members of APF's management
intend to solicit actively your support for the Acquisition and would like to
use the special meeting to answer questions about the Acquisition and the
solicitation materials and to explain in person our reasons for recommending
that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain their votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding Units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning on attending the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about
, 1999 and will continue until the later of (a) , 1999, a
date not less than 60 calendar days from the initial delivery of the
solicitation materials, or (b) such later date as we may select and as to which
we give you notice. At our discretion, we may elect to extend the solicitation
period. Under no circumstances will the solicitation period be extended beyond
March 31, 2000. Any consent form received by Corporate Election Services prior
to 5:00 p.m., Eastern time, on the last day of the solicitation period will be
effective provided that such consent form has been properly completed and
signed. If you fail to return a signed consent form by the end of the
solicitation period, your units will be counted as voting "Against" the
Acquisition of your Income Fund and you will receive APF Shares if your Income
Fund is acquired. If you prefer, you may instead vote by telephone according to
the instructions on your consent form.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
S-11
<PAGE>
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall c ost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the quarter
ended March 31, 1999, the aggregate amounts accrued or paid by your Income Fund
to us are shown below under "Historical Distributions Paid to the General
Partners and Affiliates" and the estimated amounts of compensation that would
have been paid had the Acquisition been in effect for the periods presented,
are shown below under "Pro Forma Distributions to Be Paid to the General
Partners Following the Acquisition":
<TABLE>
<CAPTION>
Quarter
Ended
Year Ended December 31, March
-------------------------- 31,
1996 1997 1998 1999
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the
General Partners and Affiliates:
General Partner Distributions............. -- -- -- --
Accounting and Administrative Services.... $118,677 $ 89,270 $102,840 $28,851
Broker/Dealer Commissions................. -- -- -- --
Property Management Fees.................. 39,206 40,087 38,570 9,001
Due Diligence and Marketing Support Fees.. -- -- -- --
Acquisition Fees.......................... -- -- -- --
Asset Management Fees..................... -- -- -- --
Real Estate Disposition Fees(1)........... -- -- -- --
-------- -------- -------- -------
Total historical....................... $157,883 $129,357 $141,410 $37,852
Pro Forma Distributions to Be Paid to the
General Partners Following the
Acquisition:
Cash Distributions on APF Shares.......... -- -- -- --
Salary Compensation....................... -- -- -- --
-------- -------- -------- -------
Total pro forma........................ -- -- -- --
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to certain minimum
returns to the Limited Partners. To date, no such fees have been paid since
the required minimum returns have not been made to the Limited Partners.
S-12
<PAGE>
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
contained herein under the caption "Financial Statements" and in the consent
solicitation under the caption "Summary--Our Reasons for Supporting the
Acquisition--Prices for Income Fund Units."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Quarter Ended March
Year Ended December 31, 31, 1999
------------------------ --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income....... $125 $600 $788 $805 $655 $155 $120
Distributions from Return of
Capital........................ -- 1 -- 15 145 45 85
---- ---- ---- ---- ---- ---- ----
Total........................... $125 $601 $788 $820 $800 $200 $205
==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from certain non-cash
items. This amount is not required to be presented as a return of capital
except for purposes of this table, and the Income Fund has not treated this
amount as a return of capital for any other purpose.
Cash distributions for the year ended December 31, 1997, include $90,000 of
amounts earned in 1997, but declared payable in the first quarter of 1998.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses during 1999. Thus, the pro forma information regarding
the distributions to APF stockholders for the quarter ended March 31, 1999 is
not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the Acquisition
with those of several alternatives, the Acquisition is more economically
attractive to you and the other Limited Partners than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
S-13
<PAGE>
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to certain closing conditions. Second, if your Income Fund is acquired,
all Limited Partners of your Income Fund who vote against the Acquisition will
be given the option of receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others, that we will be relieved
from certain ongoing liabilities with respect to Income Fund if it is that are
acquired by APF. For a further discussion of the conflicts of interest and
potential benefits of the Acquisition to us, see "Conflicts of Interest" below.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. In addition, we compared the
values of the consideration which would have been received by you and the other
Limited Partners in alternative transactions and concluded that the Acquisition
is fair based on such comparison. We believe the Acquisition is the best way to
maximize the return on your investment because of your ability to participate
in the potential appreciation of APF Shares. Since the investment in your
Income Fund is an investment in a static portfolio due to restrictions
contained in your Income Fund's partnership agreement and limited capital
resources, your investments have less of an opportunity to appreciate. Because
APF is a growth-oriented operating company, you, as an APF stockholder, will
have the opportunity to participate in APF's future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinions of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinions of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., an affiliate of CNL Group, Inc., and (3) Valuation
Associates has previously performed valuation appraisals for APF. See "Reports,
Opinions and Appraisals" in the consent solicitation.
On rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to, any other
aspect of the Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition
or the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
S-14
<PAGE>
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Legg Mason's opinion also does not compare the relative merits of the
Acquisition with those of any other transaction or business strategy which were
or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares will exceed the going concern value and
liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Net Book Value of the Income Fund. We calculated the book value of your
Income Fund under generally accepted accounting principles, or GAAP, as of
March 31, 1999 per average $10,000 original investment. Since the calculation
of the book value was done on a GAAP basis, it is primarily based on historical
cost and, therefore it is not indicative of the true fair market value of your
Income Fund. This figure was compared to three other figures:
(1) the value of the Income Fund if it commenced an orderly liquidation
of its investment portfolio on December 31, 1998,
(2) the value of the Income Fund if it continued to operate in
accordance with its existing partnership agreement and business plans, and
(3) the estimated value of the APF Shares, based on the exchange value,
paid to each Income Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Original Estimated Value of
Limited Partner APF Shares per
Investments Less Average $10,000
any Distributions GAAP Book Liquidation Going Concern Original Limited
of Sales Proceeds(1) Value Value(2) Value(2) Partners Investment
-------------------- --------- ----------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
CNL Income Fund XVI,
Ltd.................... $10,000 $8,666 $8,617 $9,449 $9,497
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
(2) Liquidation and going concern values were based on appraisals prepared by
Valuation Associates. For a complete description of the methodologies
employed by Valuation Associates, see "Reports, Opinions and Appraisals" in
the consent solicitation.
S-15
<PAGE>
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have contractual
obligations pursuant to your Income Fund's partnership agreement and state law
to assess whether the terms of the Acquisition are fair and equitable to the
Limited Partners of your Income Fund without regard to whether the Acquisition
is fair and equitable to any of the other participants, including the Limited
Partners in other Income Funds. James M. Seneff, Jr. and Robert A. Bourne act
as the individual general partners of all of the Income Funds and also as
members of the Board of Directors of APF. While Messrs. Seneff and Bourne have
sought faithfully to discharge their obligations to your Income Fund, there is
an inherent conflict of interest in serving, directly or indirectly, in a
similar capacity with respect to your Income Fund and also on APF's Board of
Directors.
Lack of Independent Representation
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received. If an independent representative
had been retained for the Income Funds, either collectively or on an individual
basis, the fees and expenses of the Acquisition would have been higher. No
group of Limited Partners was empowered to negotiate the terms and conditions
of the Acquisition or to determine what procedures should be used to protect
the rights and interests of the Limited Partners. In addition, no investment
banker, attorney, financial consultant or expert was engaged to represent the
interests of the Limited Partners. We have been the parties responsible for
structuring all the terms and conditions of the Acquisition. Legal counsel
engaged to assist with the preparation of the documentation for the
Acquisition, including this consent solicitation, was engaged by us and did not
serve, or purport to serve, as legal counsel for the Income Funds or Limited
Partners. If an independent representative had been retained for the Income
Funds, the terms of the Acquisition may have been different and possibly more
favorable to the Limited Partners. In particular, had separate representation
for each of the Income Funds been arranged by us, issues unique to the value of
each of the specific Income Funds might have been highlighted or received
greater attention, resulting in adjustments to the value assigned to the assets
of such Income Funds and increasing the number of APF Shares or notes that
would be allocable to such Income Fund if acquired in the Acquisition.
Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive two material benefits. These benefits include:
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr.
Seneff serving as Chairman of APF and Mr. Bourne serving as Vice
Chairman. Furthermore, they will be entitled to receive performance-
based incentives, including stock options, under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely
to exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of the Income Funds, we are legally liable for all
of Income Funds liabilities to the extent that the Income Funds are
unable to satisfy such liabilities. Because the partnership agreement
for each Income Fund prohibits the Income Funds from incurring
indebtedness, the only liabilities the Income Funds have are
liabilities with respect to their ongoing business operations. In the
event that one or more Income Funds are acquired by APF, we would be
relieved of our legal obligation to satisfy the liabilities of the
acquired Income Fund or Income Funds.
S-16
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Certain Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund. If
your Income Fund is acquired by APF, and you have voted "For" the Acquisition,
you will receive APF Shares. If you have voted "Against" the Acquisition but
your Income Fund is acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under certain circumstances, even
if APF were to make the same level of distributions as your Income Fund, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you. For certain other differences attributable to APF's status as a REIT,
see "--Taxation of APF" and "--Taxation of Stockholders--Taxable Domestic
Stockholders" in the consent solicitation.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF, the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain and loss based on the
exchange value, for an average $10,000 original Limited Partner investment in
your Income Fund, is set forth in the table below for those Limited Partners
subject to federal income taxation.
<TABLE>
<CAPTION>
Estimated
Gain/(Loss) per
Average $10,000
Original Limited
Income Fund Partner Investment(1)
- ----------- ---------------------
<S> <C>
CNL Income Fund XVI, Ltd.................................. $50
</TABLE>
- --------
(1) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be significantly below the exchange value.
S-17
<PAGE>
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one more individuals or entities in exchange for the stock of that corporation,
and (2) immediately after the exchange, such individuals or entities are in
control of the corporation. For purposes of section 351(a), control is defined
as the ownership of stock possessing at least 80 percent of the total combined
voting power of all classes of stock entitled to vote and at least 80 percent
of the total number of shares of all other classes of stock of the corporation.
APF has represented to Shaw Pittman, APF's tax counsel, that, following the
Acquisition, the Limited Partners of the Income Funds will not own stock
possessing at least 80 percent of the total combined voting power of all
classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if
any, assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2004, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses that
you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
S-18
<PAGE>
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the notes may recognize gain in the year of the
Acquisition despite the fact that they will not receive cash with which to pay
the tax on the gain. Such Limited Partners will adjust the basis of the notes
as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes. See "--Tax Consequences of Liquidation and
Termination of Your Income Fund" below.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares and/or notes, as the case may be, to you.
The taxable year of your Income Fund will end at this time, and you must
report, in your taxable year that includes the date of the Acquisition, your
share of all income, gain, loss, deduction and credit for your Income Fund
through the date of the Acquisition including gain or loss resulting from the
Acquisition. If your taxable year is not the calendar year, you could be
required to recognize as income in a single taxable year your share of your
Income Fund's income attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units and your holding period for
the notes for purposes of determining capital gain or loss from the disposition
of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501(c)(7), (9), (17) or (20)
of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
For a discussion of the taxation of APF, see "Federal Income Tax
Considerations--Taxation of APF" in the consent solicitation.
S-19
<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(v) 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 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 2,307,364 1,391,466 8,137 (2,450,663)(b),(c)
Interest and
Other Income..... 2,214,763 0 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 0 1,095,269 2,563,714 1,323,577 64,186 (377,734)(e)
Management and
Advisory Fees.... 697,364 0 697,364 0 0 611,196 (1,308,560)(f)
Fees to Related
Parties.......... 0 0 0 23,326 292,575 0 (292,786)(g)
Interest
Expense.......... 0 0 0 50,730 0 4,769,268 0
State Taxes...... 235,208 0 235,208 0 0 0 0
Depreciation--
Other............ 0 0 0 39,581 26,238 0 0
Depreciation--
Property......... 1,548,813 349,465(a) 1,898,218 0 0 0 0
Amortization..... 7,368 0 7,368 0 0 0 535,157 (h)
Transaction
Costs............ 125,926 0 125,926 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
Total Expenses.. 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650 (1,443,923)
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) $ (944,672)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 0 17,271 0 0 0 0
Gain on Sale of
Properties....... 0 0 0 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 (215,797) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ---------- -----------
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) (944,672)
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) $(1,193,351)
=========== ========== =========== ========== ========== ========== ===========
Earnings Per
Share/Unit....... $ 0.28 n/a n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========== ========== ===========
Book Value Per
Share/Unit....... $ 17.59 n/a n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========== ========== ===========
Dividends Per
Share............ $ 0.19 n/a n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========== ========== ===========
Weighted Average
of Units
Outstanding
During Period.... n/a 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
CNL Income Acquisition
Combined Fund XVI, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ----------- ------------------ --------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $14,523,161 $ 931,914A $ 8,642 (j) $15,463,717
Fees............. 1,256,304 0C ( 25,729)(k) 1,230,575
Interest and
Other Income..... 7,687,325 19,953 0 7,707,278
------------ ----------- ------------------ --------------
Total Revenue... $23,466,790 $951,867 $ (17,087) $24,401,570
Expenses:
General and
Administrative... 4,669,012 74,099J ( 31,583)(l),(m) 4,711,528
Management and
Advisory Fees.... 0 9,001F (9,001)(n) 0
Fees to Related
Parties.......... 23,115 0 0 23,115
Interest
Expense.......... 4,819,998 0 0 4,819,998
State Taxes...... 235,208 23,165D 8,812 (o) 267,185
Depreciation--
Other............ 65,819 0 0 65,819
Depreciation--
Property......... 1,898,278 143,404E 34,942 (p) 2,076,624
Amortization..... 542,525 1,450 0 543,975
Transaction
Costs............ 125,926 33,158 0 159,084
------------ ----------- ------------------ --------------
Total Expenses.. 12,379,880 284,277 3,170 12,667,328
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties and
Provision for
Losses on
Properties....... $11,086,909 $ 667,590 $ (20,257) $11,734,242
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 37,806L (2,529)(q) 52,548
Gain on Sale of
Properties....... 0 0 0 0
Provision For
Loss on
Properties....... (215,797) 0 0 (215,797)
------------ ----------- ------------------ --------------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 10,888,383 705,396 (22,786) 11,570,993
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ----------- ------------------ --------------
Net
Earnings(Losses).. $10,888,383 $ 705,396 $ (22,786) $11,570,993
============ =========== ================== ==============
Earnings Per
Share/Unit....... n/a $ 0.16 n/a $ 0.25
============ =========== ================== ==============
Book Value Per
Share/Unit....... n/a $ 8.67 n/a $ 16.42
============ =========== ================== ==============
Dividends Per
Share............ n/a $ 0.20 n/a n/a
============ =========== ================== ==============
Weighted Average
of Units
Outstanding
During Period.... n/a 4,500,000 n/a n/a
============ =========== ================== ==============
Weighted Average
of Shares
Outstanding
During Period.... 6,150,000 n/a 2,136,824 45,634,225(r)
============ =========== ================== ==============
</TABLE>
S-20
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
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 property
owned at end of
period.......... 513 29 542 n/a n/a n/a n/a
============ =========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.28 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 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
============ =========== ============ ========== ========== ============ ===========
Weighted average
units
outstanding
during period... n/a n/a n/a n/a n/a n/a n/a
============ =========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,401 n/a 37,347,401 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 n/a 37,348,464 n/a n/a n/a 6,150,000
============ =========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... 14,237,405 n/a n/a n/a n/a n/a n/a
Cash
distributions
declared per
$10,000
Investment...... 191 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 $ -- $ -- $ -- $ 0
Mortgages/notes
receivable...... $ 41,269,740 0 $ 41,269,740 $ -- $ -- $247,896,287 $ 0
Receivables,
net............. $ 548,862 0 $ 548,862 $7,141,967 $5,457,493 $ 1,969,339 (148,629)(w)
Investment
in/due from
joint ventures.. $ 1,083,564 0 $ 1,083,564 $ -- $ -- $ -- 0
Total assets.... $708,694,145 $33,656,518(u) $742,350,663 $8,223,820 $6,308,406 $264,700,433 $31,950,500(v1),(w)
Total
liabilities/minority
interest........ $ 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 $32,370,870(v1),(x)
<CAPTION>
Historical
CNL Income
Combined Fund XVI, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- ------------------
<S> <C> <C> <C> <C>
Other data:
Total property
owned at end of
period.......... 542 44 n/a 586
============== =========== ==================== ==================
Earnings per
share/unit...... $ n/a 0.16 $ n/a $ 0.25
============== =========== ==================== ==================
Book value per
share/unit...... $ n/a $ 8.67 $ n/a $ 16.42
============== =========== ==================== ==================
Dividends per
share/unit...... $ n/a $ 0.20 $ n/a $ n/a
============== =========== ==================== ==================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 3.26x
============== =========== ==================== ==================
Weighted average
units
outstanding
during period... n/a 4,500,000 n/a n/a
============== =========== ==================== ==================
Weighted average
shares
outstanding
during period... 43,497,401 n/a 2,136,824 45,634,225 (r)
============== =========== ==================== ==================
Shares
outstanding..... 43,498,464 n/a 2,136,824 45,635,287
============== =========== ==================== ==================
Cash
distributions
declared:....... n/a 900,000 n/a $ 19,728,819 (s)
==================
Cash
distributions
declared per
$10,000
Investment...... n/a 200 n/a $ 216 (t)
==================
Balance sheet
data:
Real estate
assets, net..... $ 647,547,023 $35,422,902 $7,468,433 (v2) $ 690,438,358
Mortgages/notes
receivable...... $ 289,166,027 $ -- $ 0 $ 289,166,027
Receivables,
net............. $ 14,969,032 $ 31,749 $ (10,797)(y) $ 14,989,984
Investment
in/due from
joint ventures.. $ 1,083,564 $ 1,647,270 $1,052,177(v2) $ 3,783,011
Total assets.... $1,053,533,822 $40,033,471 $3,728,356 (v2),(y) $1,097,295,649
Total
liabilities/minority
interest........ 346,929,801 $ 1,036,151 $ (10,797)(y) $ 347,955,155
Total equity.... $ 706,604,021 $38,997,320 $3,739,153 (v2) $ 749,340,494
</TABLE>
S-21
<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
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<CAPTION>
<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 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
</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>
<CAPTION>
<S> <C> 
